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MUNICIPAL BONDS 



Municipal Bonds 



A STATEMENT OF THE PRINCIPLES OF LAW AND CUSTOM GOV- 
ERNING THE ISSUE OF AMERICAN MUNICIPAL BONDS WITH 
ILLUSTRATIONS FROM THE STATUTES OF VARIOUS STATES 



By 

FRASER BROWN 

MEMBER OF THE NEW YORK CITY BAR, LECTURER ON FINANCE 

IN THE SCHOOL OF COMMERCE, ACCOUNTS AND 

FINANCE, NEW YORK UNIVERSITY 




New York 

PRENTICE-HALL, Inc. 

1922 



A* 



ns 



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Copyright, 1922, by 
PRENTICE-HALL, Inc. 

Printed in the United States of America 



All rights reserved 



>CU686800 



NOV 13 1922 



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To 

FREDERICK PRIME DELAFIELD, Esq. 

of the New* York City Bar 



FOREWORD AND ACKNOWLEDGMENT 

The necessity for a book of this character became apparent 
during the preparation of a course of lectures on municipal 
bonds recently delivered at the School of Commerce, Accounts 
and Finance of New York University. An examination of 
existing literature revealed a lack of any comprehensive treat- 
ment of the subject, and suggested the present volume. The 
author sincerely hopes that the result of his effort will be 
valuable and of interest, not only to students of municipal 
finance, but to municipal-bond houses, public officials respon- 
sible for bond issues, and the general investor. 

The literature on the subject of municipal bonds begins 
with the late Judge Dillon's masterly treatise on the law of 
municipal corporations. There is, however, an hiatus be- 
tween the "Law of Municipal Corporations" and articles in 
various textbooks covering the general field of investments, 
and casual articles by investment bankers. 

The general principles of municipal-bond law can be stated 
for the student and the "bond man." The adoption of the 
Uniform Negotiable Instruments Law by all the States (ex- 
cept one) has inevitably tended to produce more or less uni- 
form decisions on mooted points. While there are curious 
decisions in many jurisdictions, it is probably true that these 
decisions are the result of hard facts, which are said to make 
bad law. Generally speaking, fundamental canons have been 
worked out and further judicial decisions must tend more and 
more toward recognition of established rules. The work of 
the legal specialist is statutory construction. 

An attempt is made in the following pages to treat the 
fundamental principles of the subject clearly and concisely, 
leaving to the specialist the application of such principles and 
the consideration of the law of the jurisdiction applying to 
particular issues of securities. 

If much of the material is quoted or taken from the "Law 
of Municipal Corporations," it is because that treatise has done 

vii 



viii FOREWORD AND ACKNOWLEDGMENT 

for the law of municipal corporations what Bishop did for 
the law of domestic relations, and what Whigmore has done 
for the law of evidence. Numerous citations and direct and 
indirect quotations from "Ruling Case Law" seem justified 
because it is unnecessary to re-state principles of law which 
have been adequately stated in that digest. 

Acknowledgment is due to my associate, Lewis L. Dela- 
field, Jr., Esq., for kindly criticism and advice, and to other 
associates, who have verified citations and read the proofs of 
this book. Acknowledgment is not complete without an 
expression of great appreciation of the counsel, encourage- 
ment and example of the associate to whom this book is 
dedicated. 

Fraser Brown. 



CONTENTS 

CHAPTER PAGE 

I — The Problem Stated 1 

The municipal bond; creature of law; general principles 
must be studied; the municipality existed before the na- 
tion; municipal needs create municipal debt; necessity for 
borrowing money; annual taxation inadequate; procedure 
of bond issue outlined; tax ordinance; budget; bond ordi- 
nance. 

II — The Municipal Bond 9 

The municipal bond is a negotiable instrument; attri- 
butes of negotiability; conditions of negotiability; compo- 
nent parts of a municipal bond described; coupons; reg- 
istration. 

Ill — Municipal Corporations 18 

Defined; are creatures of the State; created by special 
charter or pursuant to general laws; powers; expressed or 
implied; governmental or proprietary; classification. 

IV — Municipal Property and Improvements . . 24 

History of human race is the history of cities; increase 
of public activities; municipal expenditures; running ex- 
penses; debt service; property and improvements; capacity 
to hold and acquire property; power to make public im- 
provements; improvements outside of municipality; public 
utilities; sale of commodities; construction of houses. 

V — Taxation and Limitation of Taxes ... 32 

Tax defined ; power to tax inherent in the State ; exer- 
cised by legislature; delegated to municipalities and local 
taxing boards; classification of taxes; capitation or poll; 
property taxes ; assessments ; excise and income taxes ; 
taxation for debt service ; its importance ; limitations on tax 
rates; arguments against tax limits; especially for debt 
service. 

VI — Municipal Borrowing 42 

Power to incur indebtedness ; nature and scope ; does 
not include the power to issue negotiable securities ; limita- 
tions on the power; constitutional; statutory; illustrations; 
power to issue negotiable instruments; nature of power; 
statutory illustrations; refunding; ratification; short term 
loans. 



CONTENTS 



VII — The Promissor in the Bond 61 

The sovereign or state ; cannot be sued without its con- 
sent; the county; duplication of taxation by subdivisions; 
debt of subdivisions; contingent liability; the municipality; 
implied power to borrow; express power to issue bonds; 
quasi-municipalities defined and classified. 

VIII — The Promise and Purpose of the Bond . 66 

The promise of the bond is not shown on its face ; 
limited by constitutional or statutory tax rates which re- 
sult in limited obligations ; limitations may be to special 
fund; hence bonds not negotiable instruments; limitations 
by reason of area of land taxed; the purpose of the bond; 
bond issued for self-sustaining public utilities; bonds issued 
for non-revenue-producing improvements. 

IX — The Maturity of the Bond 73 

Bonds classified as to time of payment; term bonds due 
and payable at one time; callable; debt service sinking 
fund; disadvantage of sinking funds; serial bonds pay- 
able in annual installments; equal installments; substan- 
tially equal installments; deferred installments; debt serv- 
ice for serial bonds; no sinking fund required; term may 
be limited to life of improvement; reason for such limi- 
tations. 

X — Sale and Award 85 

Private sale of bonds; advantages to municipality; to 
brokers; disadvantages to municipality; to brokers; public 
sale; advantages and disadvantages; illustrative statutory 
provisions; par sale; economic fallacy and political neces- 
sity; evasion of par-sales requirements; brokerage and 
commissions; form of notices of sale and propositions 
responsive thereto. 

XI — Default and Remedy of the Bondholder . 96 

Default defined; consequences and prevalence of de- 
fault; reasons for default are inability to pay, or bad 
faith; remedy of the bondholder; judgment for amount 
due; mandamus to levy taxes; position of the courts; ac- 
tions based on contract; legislative relief; good faith of 
issuing municipality. 

XII — Bonds as Investments .105 

Elements of an ideal investment for individuals; security 
of principal; fixed or definite interest; fair income return; 
merchantability; collateral for loans; freedom from tax- 
ation; freedom from care; satisfactory maturity; conve- 
nient denomination; possibility of depreciation; invest- 
ments by executors, trustees, and savings banks; regulated 
by statutes; illustrations; postal savings deposits. 

XIII — Taxation of Bonds 118 

General considerations; the taxing power defined; of the 
United States; of the States; taxation of the principal of 



CONTENTS xi 

CHAPTER PAGE 

bonds; by the United States; by the States; taxation of the 
income of bonds; nature of the tax; by the United States; by 
the States; bonds owned by non-residents; inheritance tax. 

XIV — Valuation of Bonds 128 

Money is a commodity; its price is interest; normal and 
net yield from bonds; tables of bond values; basis; fluc- 
tuations and differences in yield; purchasing power of 
money; market conditions; differences in value exist be- 
tween the bonds of different issuing units ; bonds of same 
class are not equally valuable; factors are valuation of 
taxable property; indebtedness; tax rates; population; 
municipal credit; the practice of valuation described; dif- 
ference of opinion; source of information. 

XV — Incontestability and Validation . . . 145 

The menace of default; improvements in standard of 
honesty and legislation; estoppel by recital; effect; short 
statutes of limitations; illustrated; validation of decree of 
administrative department; by order of court; doctrine of 
res adjudicata; constitutional difficulties; registration by 
officials; certification of signatures and seal. 

XVI — Particular Bonds 155 

Bonds of cities ; counties ; minor municipalities; tax dis- 
tricts; bonds issued for income-producing public utilities; 
for other properties or improvements; bonds payable from 
direct general taxes; from assessments; electoral bonds. 

XVII — The Attorneys' Functions 161 

Difficulties usually arise before issue; the attorneys' 
functions; when retained by the municipality; the advan- 
tages of such procedure; when retained by the purchaser; 
the disadvantages of such procedure; the record of pro- 
ceedings; the purpose of the record; and its contents; the 
opinion of counsel ; preliminary and final ; the meaning of 
the opinion; qualified opinions; merchantability of opinions. 

XVIII — Practical Suggestions 180 

Publicity of bond sales; by advertising; list of periodi- 
cals; circulars; preparation and certification of bonds; side 
agreements with dealers; place of payment of principal 
and interest; promptness in payment; employment of 
counsel. 

Appendix A 187 

Outline analysis of subject. 

Appendix B 197 

The Municipal Finance Act of North Carolina. 

Appendix C 215 

Definitions of terms used in investment banking. 

Bibliography / 223 

Index 225 



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MUNICIPAL BONDS 

Chapter I 
THE PROBLEM STATED 

Origin of municipal bond. — The municipal bond is a 
creature of law. There is no other security which to the 
same extent as the municipal bond owes its incidents to law 
and not only to law but to statutory law. The origin of a 
municipal bond is a statute, or more than one statute. Its 
terms, its effect, its means of payment, are all statutory. 
There is no other written instrument, except the promissory 
note and the last will and testament, which depends so much 
for its vitality upon statute law. 

While statutes governing the issue of bonds differ greatly 
among themselves, there is, and always must be, a certain 
similarity and agreement in principles, because such statutes 
aim to produce substantially the same result. General prin- 
ciples can be deduced from a study of statutes and decisions 
of the courts, construing fiscal legislation. 

To form any right judgment on a municipal bond, a 
knowledge or at least an understanding of principles is nec- 
essary. Unless we clearly understand what a municipal cor- 
poration is, what its financial powers are, how it raises its 
money, and how it pays its debts, we can have no intelligent 
appreciation of the circumstances which make its bonds worth 
much or little. 

Early importance of municipality. — With the political 
history, even with the history of the growth and develop- 
ment of municipalities, we are not particularly concerned. 
Our interest is with the present and immediate future. We 
may, however, note in passing that the city (the municipality) 
is older than the state or the nation. The glory that was 
Greece and the grandeur that was Rome, was the glory of 

1 



2 MUNICIPAL BONDS 

Athens and the grandeur of the Eternal City, not of well- 
defined nations with clearly limited frontiers. Paris was a 
great lady before modern or even medieval France arose to 
do her homage. London lay before the spires of Westmin- 
ster before the Welsh marches or the Scottish border knew 
the King's peace. New York, Boston and Philadelphia were 
relatively metropolitan before thirteen sovereign and inde- 
pendent commonwealths gathered to form the United States. 

As man emerged from the savage state, his relative weak- 
ness and lack of natural offensive members developed the 
need of mutual aid and protection. Groups of families 
formed villages in the remote past as today. The close asso- 
ciation of human beings with fixed habitations and common 
necessities developed needs which could and can be met only 
by co-operation. A large and dense collection of human 
beings occupying a limited area have needs peculiar to them- 
selves, which create the necessity for municipal or local gov- 
ernment and regulation, and thus in its turn the necessity for 
corporate organization. 

What those needs are we know in a general way, but we 
must give them passing consideration. How those needs are 
met it will be our secondary purpose to ascertain. The result 
of such needs expressed in terms of today is municipal debt. 
The evidences of such debt are the subject of our inquiry. 

Origin of bond issue. — A bond issue has its origin in the 
necessity for borrowing money. When a municipal corpora- 
tion decides to undertake a public improvement such as the 
construction of a water supply system, it borrows the money 
to pay the cost. It borrows because the cost is usually too 
great to be raised in one year from current taxes. 

Suppose that a small city raises by tax each year five hun- 
dred thousand dollars to pay its expenses. Its tax rate may 
be two dollars and fifty cents for each hundred, or twenty-five 
dollars for each thousand dollars of taxable property. The 
assessed valuation of taxable property in such a city, having 
the assumed tax rate and budget, is twenty million dollars. 
If it becomes necessary or desirable to expend two hundred 
and fifty thousand dollars on its water supply system, the 
effect on the tax rate of raising all the money in one year 
would be to increase it to three dollars and seventy-five cents 
a hundred or thirty-seven dollars a thousand. This exceeds 
the rate of tax which can be endured by property assessed at 



THE PROBLEM STATED 3 

its full cash value. Hence the money for the water supply 
system must be borrowed and repaid in installments. 

As evidence of the borrowing, the city authorizes its 
proper officers to execute and deliver promises to repay the 
borrowed money at a definite time. Such instruments are 
called bonds and are negotiable instruments, on which interest 
is payable at an agreed rate per annum. 

It not infrequently happens that the necessity for a bond 
issue arises from pressure exerted by local banks. The annual 
municipal revenues may have fallen short and the deficiency 
of taxes may have forced the municipality to borrow to meet 
its running expenses. Obligations issued in anticipation of 
current revenues ought not to be funded and may not be, in 
States having proper fiscal statutes. But appropriations may 
have been made for capital expenditures, and local banks may 
have loaned the city money for a short period until taxes are 
collected, or bonds can be issued. 

The impulse to issue bonds may come when a bank exam- 
iner calls the attention of the bank to the fact that it holds 
too much city paper — an amount beyond the limit which it is 
legally authorized to lend or an amount too great in relation 
to its assets. 

Preliminary steps. — The necessity having arisen and the 
initiative having been taken by the executive, the financial 
officer or officers consult the law-making body, such as the 
city council in second class cities in New York State. Ordi- 
narily the city council has a committee on finance, the mem- 
bers of which have had little or no experience with, or under- 
standing of, financial problems. Nevertheless, the finance 
committee meets and confers with the financial officials and 
it is agreed that bonds must be issued. In short, the finance 
committee agrees to recommend the passage of appropriate 
local legislation, that is, the ordinance or resolution author- 
izing the bonds. 

Then the delegated officials confer with the corporation 
counsel and the latter consults with counsel who makes a 
specialty of municipal business. At this conference the facts 
are laid before counsel. The interest rate which the pro- 
posed bonds are to bear is frequently determined after con- 
sultation with the representatives of the better class of invest- 
ment banking houses, the term or length of time the bonds 
are to run is computed, and other details are arranged. 



4 MUNICIPAL BONDS 

Ordinance authorizing bond issue. — An ordinance author- 
izing the bonds is next prepared and a draft submitted to the 
local authorities for consideration. If satisfactory in form, 
it is introduced in the local legislative body. If the majority 
of the council be of the same political faith as the officials in 
charge of the matter, the ordinance is made an administration 
measure and all the members of the council of that particular 
political party retire around a corner and ''caucus." The 
minority members retire around another corner and like- 
wise "caucus." Then it shortly appears in the newspapers 
that the majority party, being possessed of all the wisdom, all 
the intelligence and all the administrative ability of the na- 
tion, as locally represented, is about to introduce an ordi- 
nance for the issue of bonds. 

We will assume that the ordinance is introduced, prop- 
erly approved in caucus and adopted by the necessary vote. 
A two-thirds or larger vote is frequently required. Counsel 
then prepares the necessary resolution prescribing the form 
and contents of the bond and setting forth the notice of sale 
which must be published. 

Printing. — If the market is fairly stable and the interest 
rate can be regarded as settled, it is usually advisable at this 
point actually to prepare — that is, engrave or print — the 
bonds themselves. The practice of engraving municipal 
bonds has practically disappeared. They are printed on 
tinted sheets with steel-engraved borders and the perfection 
of printing is such that, everything considered, a type-printed 
bond makes a better looking instrument. Regarding coupons, 
experience shows that they should be reproduced by photo- 
lithography to obtain the best results. 

Publication of notice. — Public sale of the bonds is usually 
required. This means that a notice must be published de- 
scribing the proposed issue by its amount, interest rate, ma- 
turity, and the like, and stating that the bonds of the issue 
will be offered for sale at a specified time and place. During 
periods of daylight-saving time it has been found helpful to 
specify which variety of time is meant. The notice of sale 
contains all the provisions which an intending bidder needs 
to know and usually calls for sealed offers or proposals for 
the purchase of the bonds which must be accompanied by a 
certified good-faith check for a stated percentage, usually two 
per cent of the amount of the issue. The notice should be, 



THE PROBLEM STATED 5 

and is sometimes required to be, published in a metropolitan 
financial paper. 

Sale. — The zero hour having arrived, representatives of 
interested bond houses meet the municipal officials in charge 
of the matter at the place of sale. After the bids have been 
received and opened for consideration, a list is prepared and 
the highest bidder determined. A resolution awarding the. 
bonds to the successful bidder is then adopted. 

When the bonds are prepared and ready for delivery, the 
purchasing bond house is notified. Counsel is requested to 
say whether or not the bonds can be taken up. When all is 
ready, a representative of the purchaser meets with the 
financial officer in charge of the delivery and brings with him 
a certified check to pay for the bonds — the amount of which 
check has previously been determined — and the bonds are 
counted, examined as to signatures, delivered, and paid for. 

With the merchandising of the bonds — the sale by the 
dealer to the ultimate holder or investor — this book has 
no concern. The various kinds of municipal bonds which find 
a place in the market and the numerous elements which deter- 
mine the price at which such bonds can be sold under ordinary 
conditions are, however, discussed. 

Municipal ordinances and budgets. — Reference has been 
made to the budget and to the bond ordinance or resolution. 
A preliminary reading of a municipal tax ordinance, budget, 
and bond ordinance, and consideration of the form of each, 
will be helpful to an understanding of the discussions of prin- 
ciples. The tax ordinance is the written legislative act of the 
local board or body having the power to levy taxes, which 
provides for the levying of a tax for municipal purposes and 
specifies in general terms the objects for which the tax is 
levied. The budget specifies in detail how the amount of tax 
is to be expended. The bond ordinance is the legislative act 
of the municipality, authorizing the issue of bonds. Forms 
of each of these documents follow this chapter. 

Tax Ordinance of the City of Clifton, New Jersey, for the 

Year 1922 

AN ORDINANCE RELATING TO TAXES FOR THE YEAR NINETEEN 
HUNDRED AND TWENTY-TWO 

BE IT ORDAINED, by the City Council of the City of Clifton that there 
shall be assessed, raised by taxation and collected for the fiscal year 1922 the 



6 MUNICIPAL BONDS 

sum of Six Hundred Twenty-Six Thousand, Four Hundred Twenty-Three 
Dollars and Ninety Cents ($626,423.90), for the purpose of meeting the appro- 
priations set forth in the following statement of resources and appropriations 
for the fiscal year 1922. 

RESOURCES 

Surplus Revenue Appropriated None 

Miscellaneous Revenues $ 76,900.00 

School Monies from State, School Balances, etc 102,000.00 

Revenue from other sources than Taxes $178,900.00 



APPROPRIATIONS 

Appropriations in City Budget $397,702.76 

Appropriations for School Purposes 387,150.00 

Overexpenditure of Appropriations, 1921 18,053.65 

Deficit Surplus Revenue, 1921 2,417,49 

$805,323.90 
Revenue from other sources than Taxes 178,900.00 

Net amount to be raised by Taxation $626,423.90 



Budget of the City of Clifton, N. J. 

For the Fiscal Year Beginning January i, 1922, and Ending 
December 31, 1922 

ANTICIPATIONS 

1922 

Surplus Revenue None 

Surplus Revenue Appropriated None 

MISCELLANEOUS ANTICIPATED: 

Fees and Permits $ 4,000.00 

Fines and Penalties 4,000.00 

Health Permits 3,000.00 

Franchise Tax 40,000.00 

Gross Receipts Tax 6,500.00 

Interests and Costs 7,100.00 

Licenses 4,300.00 

Poll Tax 2,000.00 

Auto Bus Receipts 6,000.00 

$ 76,900.00 
Amount to be raised by Taxation 320,802.76 

$397,702.76 



THE PROBLEM STATED 1 

APPROPRIATIONS 

1922 

GENERAL GOVERNMENT: 

Administrative and Executive $ 16,000.00 

Assessment and Collection of Taxes 9,200.00 

Department of Finance 1,200.00 

Interest on Current Loans 7,000.00 

Grounds and Buildings 4,500.00 

Advertising, Printing and Office Supplies 5,500.00 

PRESERVATION OF LIFE AND PROPERTY: 

Police 65,000.00 

Police Pension Fund 2,600.00 

Fire 28,500.00 

Rental of Hydrants 5,000.00 

HEALTH AND CHARITIES: 

Health 7,000.00 

Charities 500.00 

Poor 5,000.00 

STREETS, HIGHWAYS AND SEWERS: 

Cleaning and Maintenance of Streets 20,000.00 

Street Improvement Liabilities 1921, 1920, 1919 25,302.80 

Garbage and Ashes 12,500.00 

Lighting of Streets 17,500.00 

Trees 1,000.00 

Engineering Department 14,000.00 

County Bills unpaid 1920-1921 32,298.15 

EDUCATION: 

Library 4,000.00 

DEBT SERVICE: 

Payment of Bonds 30,000.00 

Payment of Sinking Fund 13,936.26 

Interest on Bonds 59,700.0) 

School Construction in excess of bond issue 465.55 

CONTINGENCIES 10,000.00 



$397,702.76 



School Bond Ordinance for the City of Camden, N. J. 

AN ORDINANCE AUTHORIZING THE ISSUE OF $1,000,000 SCHOOL 

BONDS OF THE CITY OF CAMDEN AND PROVIDING 

FOR THEIR PAYMENT 

RECITALS: 

Pursuant to due action by the Board of Education and the Board of School 
Estimate an appropriation has been requested for certain school purposes as 
follows: 

Purpose Cost 

Building and furnishing two new fireproof school houses. . . .$ 385,000 
Building and furnishing additions to three non-fireproof 

school houses 425,000 

Building fireproof administration building and stockroom... 50,000 



MUNICIPAL BONDS 

Purpose Cost 

Furnishing machine shop in new high school 65,000 

Constructing cement sidewalks and fences for all schools 75,000 



$1,000,000 



It is advisable to issue bonds to provide funds for said purposes in pur- 
suance of an Act of the Legislature of the State of New Jersey entitled: "An 
Act to establish a thorough and efficient system of free public schools, and to 
provide for the maintenance, support and management thereof," approved 
October 19, 1903, as amended. 

The average of the different periods assigned by said statute for the 
maturity of bonds issued for said purposes, taking into consideration the amount 
of bonds to be issued as herein provided for said several purposes, is thirty- 
three {33) years. 

BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF 
CAMDEN: 

Section 1. School bonds of the City shall be issued in the aggregate 
principal amount of $1,000,000, shall be dated May 1, 1922, and $30,000 thereof 
shall mature on May 1 in each of the years 1923 to 1945 inclusive and $31,000 
thereof shall mature on May 1 in each of the years 1946 to 1955 inclusive. 
Said bonds shall bear interest at the rate of five per centum (5%) per annum, 
payable semi-annually on May 1 and November 1 in each year, shall be of the 
denomination of $1,000 each, and shall be in such form as may be provided by 
resolution. 

Section 2. Said bonds shall be sold at public sale as provided by law, or if 
no bids are received at public sale, then at private sale. 

Section 3. In each year after the issuance of said bonds, the City shall in 
its annual tax levy raise money sufficient to pay the interest and principal of 
such bonds as may mature during such year. 

Section 4. This Council does hereby concur in and consent to the appro- 
priation referred to in the preambles hereof, and to the issuance of the bonds 
herein authorized. 

Section 5. All ordinances and parts of ordinances in conflict herewith 
are hereby repealed. This ordinance shall take effect immediately. 



Chapter II 
THE MUNICIPAL BOND 

Conditions of negotiability. — Generally speaking, bonds 
are not negotiable instruments. This is probably true with- 
out qualification as to the bonds of individuals, and the excep- 
tion is in the case of bonds issued by various bodies corporate 
and politic. The development of modern business has made 
it necessary that these obligations should be easily and readily 
transferable, and that purchasers should take them free of 
all latent equities. 

The municipal coupon bond payable to bearer or order 
is a negotiable instrument, having all the attributes of nego- 
tiable paper under the law merchant and the uniform nego- 
tiable instruments laws of the various States. The United 
States Supreme Court has said: "Obligations of municipali- 
ties in the form of these in suit here are placed, by numerous 
decisions of this Court, on the footing of negotiable paper. 
They are transferable by delivery and, when issued by com- 
petent authority, pass into the hands of a bona fide purchaser 
for value before maturity, freed from any infirmity in their 
origin"; 1 and whenever the question has arisen, it has been 
so decided where the bond has been properly drawn. 

The conditions of negotiability, so far as applicable to 
municipal bonds, are : 

A. The instrument must be in writing and signed by the maker or 

drawer, 

B. It must contain an unconditional promise or order to pay a cer- 

tain sum of money, 

C. On demand, or at a fixed or determinable future time, 

D. To order or bearer. 

Brief consideration will show that a municipal bond, pay- 
able to bearer or order, has all the elements of negotiable 
paper. It remains a "negotiable instrument" if registered, 2 

1 Cromwell <v. Sac (1877), 96 U. S. 51. 

2 Daniels, p. 1683; D'Esterre v. New York (1900), 104 Fed. 605. 

9 



10 MUNICIPAL BONDS 

but if properly registered, its negotiable character may be 
said temporarily to be suspended. 3 

Bona fide purchaser has good title. — The incidents and 
consequences of such negotiability need not be fully considered 
here, and belong indeed to the study of negotiable instru- 
ments, as such. For our particular purposes, it is important 
only to note that there is no defense to a suit for payment 
of a negotiable instrument (valid in its inception) in the 
hands of one who has acquired it before maturity, for value 
and without notice of any defenses. The settled rule of com- 
mercial law is that one is a bona fide purchaser of negotiable 
paper (such as is a properly drawn and issued municipal 
bond) who takes it before maturity and without notice of 
equities, and such purchaser is said to obtain a perfect title. 
One who purchases from a bona fide holder gets as good a 
title as the seller had. 

Instrument void in inception never valid. — It must be 
kept in mind, however, that the protection afforded a bona 
fide holder of a negotiable municipal bond does not validate 
an instrument which is void in its inception; that is, a bond 
which the municipality has no power to issue. The analogy 
between such a bond and the promissory note of a lunatic is 
perfect. A lunatic after "office found," that is, after a 
sheriff's jury has declared the individual to be "non compos 
mentis," has no power whatsoever to make a contract. Hence 
a lunatic (after "office found") cannot make a valid promis- 
sory note. Whatever the instrument is, it is not a negotiable 
instrument with the attributes of negotiability. 

Different forms of bonds. — The form of a municipal 
coupon bond, registerable at the option of the holder as to 
principal only or as to both principal and interest, with its 
coupons, conversion certificate and registration gridiron, fol- 
lows this chapter. Such bond is payable to bearer and hence 
is transferable by delivery. If the owner so desires, it may 
be registered as to principal in his name, after which regis- 
tration it is payable only to the person in whose name it is 
registered, until such registration is changed. The owner 
may also cause it to be fully registered, that is, as to interest 
as well as to principal. If this is to be done, the coupons are 
detached and cancelled and the fact noted on the conversion 
certificate. 

3 Switzerland v. R. R. (N. Y., 1912), 152 App. Div. at 75. 



THE MUNICIPAL BOND 11 

Forms of coupon and registered bonds used in New York 
follow the New Jersey form first referred to. The peculiarity 
of a New York coupon bond is that while it may be fully 
registered — that is, as to both principal and interest — it may 
not be registered as to principal only. A bond in the form 
first given may be registered as to principal only and the 
coupons may continue to pass by delivery as they are not 
affected by such registration. 

The narrative of a bond. — The narrative of a bond begins 
with the name of the promising corporation which should 
always be its correct legal corporate title. A mere misnomer 
does not in most, if not all, jurisdictions affect the validity of 
the instrument but it is apt to make the draftsman feel fool- 
ish. Some cities have curious names. Trenton, New Jersey, 
for instance, is "The Inhabitants of the City of Trenton." 
Hoboken, no longer having a council, and whose mayor is only 
such for ceremonial purposes, is legally known as "The 
Mayor and Council of the City of Hoboken." New York 
City was until recently "The Mayor, Aldermen and Com- 
monalty of the City of New York." Apparently everybody 
but the mayor and aldermen constituted the common herd. 

The present tendency is toward short names, and many mu- 
nicipalities, particularly in New Jersey, have taken advantage 
of the permission contained in general statutes to shorten 
their long and unwieldy titles. 

The clause "for value received" deserves consideration. 
No contract is valid without a consideration — something paid 
or done to induce the promise to be made. If the maker of 
the promise — that is, the bond — says it has "received value," 
it will not be heard to deny the truth of the statement. 

Next comes the promise to pay to the bearer of the bond 
a designated sum of money, usually one thousand dollars, on 
a definite date and to pay interest at a specified rate per cent 
at certain times. The medium of payment, that is whether 
gold coin, lawful money, or whether payable in New York 
exchange, is stated, as is also the place of payment. 

Parenthetically we may note that the bond differs from 
most other bonds in that it does not begin with "Know all 
men by these presents." This expression went out of fashion 
some years ago, and now obtains only in localities where legal 
verbiage is more important than legal effect. 

Registered versus coupon bonds.— The covenant as to 



12 MUNICIPAL BONDS 

registration follows. Until recently (although of late years 
the individual investor has acquired prominence as a pur- 
chaser of municipals) savings banks, insurance companies and 
trustees were the purchasers of most municipals, and pre- 
ferred to have their bonds registered, thus making it unnec- 
essary for their officers and agents to cut coupons and acquire 
the coupon thumb. The real purpose was to suspend nego- 
tiability, in order to protect their securities from theft. The 
individual investor wants coupon bonds, which are transfer- 
able by delivery, and the ownership of which is not evidenced 
by registration. 

The description of the issue ordinarily sets out its prin- 
cipal amount and maturities. This is followed by a refer- 
ence to the statute which authorizes the issue of the bond 
and ordinarily a reference to local legislation. 

Dillon's estoppel clause. — The value of such a clause is 
great, for it means that all acts and things necessary to be 
done have been done in a legal manner. An estoppel is not, 
however, complete protection, for the officer signing the bond 
must have authority to make it and no recital can make up 
for an entire lack of authority. This should always be kept in 
mind by the prospective bond purchaser. 

"If a municipal corporation, having general authority to 
issue bonds for specified purposes, puts forth a negotiable 
municipal bond issued for a lawful purpose, and therein re- 
cites, through its duly authorized officials, whose province 
and duty it is to ascertain and peculiarly to know the facts, 
compliance with the specific provisions of the law essential to 
the issuance of the bond, the municipality is, as against a bona 
fide holder of the bond, purchasing for value, and on faith of 
the recitals, estopped to deny the truthfulness of the 
recitals." 4 

"Nothing is better settled than this rule — that the pur- 
chaser of bonds, such as these, is held to know the constitu- 
tional provisions and the statutory restrictions bearing on the 
question of the authority to issue them; also the recitals of 
the bonds he buys; while, on the other hand, if he act in good 
faith and pay value, he is entitled to the protection of such 
recitals of facts as the bonds may contain." 5 

The face of the bond ends with the testimonium, or name 

*To*vn of Climax v. Burnside (Ga. 1920), ISO Ga. 556; 104 S. E. 435. 
''Lake Co. v. Graham (1888), 130 U. S. 674 at 680. 



THE MUNICIPAL BOND 13 

of the promissor, and statement of the official character of the 
officers signing the instrument, the date of the instrument, 
the signatures of the officers and the corporate seal. 

The coupons attached call for the payment of a definite 
sum, usually a half year's interest, on a definite date and they 
are separate and independent promises to pay and in them- 
selves constitute negotiable instruments. 

On the back of the bond, ordinarily called the panels, the 
conversion certificate usually appears, and the registration 
gridiron, the purposes of which are obvious. 

Municipal bond rarely secured by lien on specific prop- 
erty. — In conclusion, it should be noted that the municipal 
bond is rarely secured by a lien on specific property. A lien 
in the strict legal sense is the right of a creditor to sell prop- 
erty belonging to the debtor to satisfy the debt. Many bonds 
of private corporations are liens on real estate but a municipal 
bond, payable as we shall see from moneys raised by taxation, 
is a lien upon nothing, not even on the general revenues of the 
municipality issuing it. The means of obtaining funds to pay 
the bond and the remedy of the bondholder in case of default 
are discussed in subsequent chapters. 



Form of New Jersey Coupon Bond, Registerable as to 
Principal Only or as to Both Principal and Interest 

No. $1,000. 

STATE OF NEW JERSEY, THE CITY OF CAMDEN 

SCHOOL BOND 

The City of Camden, a municipal corporation of the State of New Jersey, 
for value received, promises to pay to the bearer of this bond, or if it be regis- 
tered, to the registered holder on the first day of May, 19 , the sum of one 
thousand dollars ($1,000.) and to pay interest thereon at the rate of four and 
one-half per centum (4H%) per annum, semi-annually on the first days of 
May and November in each year from the date of this bond until it matures, 
upon presentation and surrender as they severally mature of the coupons 
therefor annexed hereto, or if this bond be registered as to both principal and 
interest, then to the registered holder. Both principal and interest of this bond 
will be paid in lawful money of the United States of America, at the office of 
the City Treasurer of said City. 

This bond may be registered as to principal by the holder in his name on 
the books of the City, kept in the office of the City Treasurer, and such regis- 
tration shall be noted on the back of this bond, after which no valid transfer 
of this bond shall be made except on said books until after registered transfer 
to bearer. Such registration shall not affect the negotiability of the coupons 



14 MUNICIPAL BONDS 

which shall continue to pass by delivery. At the request of the holder, this 
bond will be converted into a bond registered as to both principal and interest 
and the coupons annexed hereto detached and cancelled and thereafter both 
principal and interest shall be payable only to the registered holder. 

This bond is one of an issue, the authorized principal amount of which 
is $1,000,000, the bonds of which are of like tenor, except as to maturity, and 
is issued pursuant to an Act of the Legislature of the State of New Jersey, 
entitled: "An Act to establish a thorough and efficient system of free public 
schools and to provide for the maintenance, support and management thereof," 
approved October 19, 1903, and the acts amendatory thereof and supplemental 
thereto, and an ordinance of said City entitled: "An Ordinance authorizing the 
issue of $1,000,000 School Bonds of the City of Camden and providing for their 
payment" duly adopted April 13, 1922, and published as required by law. 

It is hereby certified and recited that all conditions, acts and things re- 
quired by the Constitution and Statutes of the State of New Jersey to exist, 
to have happened and to have been performed, precedent to and in the issuance 
of this bond exist, have happened, and have been performed, and that the issue 
of bonds of which this is one, together with all other indebtedness of said City, 
is within every debt and other limit prescribed by the Constitution and Statutes 
of said State. 

IN WITNESS WHEREOF, the City of Camden has caused this bond to be 
signed by its Mayor and City Comptroller under the seal of the City and 
attested by the City Clerk and the coupons hereto annexed to be authenticated 
by the facsimile signature of the City Treasurer and this bond to be dated the 
first day of May, 1922. 



Mayor 
City Comptroller 



Attest: 

City Clerk 



Form of Coupon 
No. $22.50 

The City of Camden, a municipal corporation of the State of New Jersey, 

will pay to the bearer on the 1st day of , 19. . . ., 

the sum of Twenty-two and 50/100 Dollars ($22.50) in lawful money of the 
United States of America, at the office of the City Treasurer of said City, being 
six months interest then due on its School Bond dated May 1, 1922, and bear- 
ing No 



City Treasurer 



Certificate of Registration 

I hereby certify that at the request of the holder of the within bond, for its 
conversion into a bond registered as to both principal and interest, I have this 

day cut off and destroyed coupons attached thereto, numbered 

from to , inclusive, of the amount and value of 

Twenty-two and 50/100 Dollars ($22.50) each, amounting in the aggregate to 

Dollars ($ ) , and that the within bond is 

hereby converted into a registered bond, with the principal thereof and semi- 



THE MUNICIPAL BOND 15 

annual interest thereon payable to , assignee 

or legal representative. 

Dated ,19 



City Treasurer 
The within bond has been registered as follows: 



Date of Registry 



Name of Registered Holder 



Registered by 



Form of New York Coupon Bond, Registerable Only as to 
Both Principal and Interest 

No. 1 $1000. 

UNITED STATES OF AMERICA, STATE OF NEW YORK, 

COUNTY OF WESTCHESTER, VILLAGE OF RYE 

WATER BOND 

The Village of Rye, a municipal corporation of the State of New York, for 
value received promises to pay to bearer, or if this bond be registered, to the 
registered holder hereof, on the first day of December, 1922, the sum of One 
Thousand Dollars ($1000), and to pay interest thereon at the rate of five per 
centum (5%) per annum, payable semi-annually on June 1 and December 1 
in each year, upon presentation and surrender as they severally mature, of the 
coupons therefor annexed hereto, or if this bond be registered, then to the 
person in whose name it is registered. Both principal and interest of this bond 
are payable in lawful money of the United States of America at the office of 
the Village Treasurer. 

This bond may be converted into a registered bond, as provided by the 
General Municipal Law, and be registered on the books of the Village, and 
thereafter is transferable only upon presentation to the Clerk thereof with a 
written assignment duly acknowledged or proved. Upon presentation thereof, 
with such assignment, the Clerk will note such transfer on this bond and on 
said books. 

This bond is one of an issue of $10,000 bonds of like date and tenor, except 
as to denomination and maturity, numbered from 1 to 100 inclusive, issued 
pursuant to the provisions of the Village Law, constituting Chapter 64 of the 
Consolidated Laws of the State of New York, and a proposition adopted at an 
election held in said Village on November 8, 1921, and a resolution of the 
Board of Trustees of said Village adopted November 10, 1921. 

It is hereby certified and recited that all conditions, acts and things required 
by the Constitution and Statutes of the State of New York to exist, to have 
happened and to be performed precedent to and in the issuance of this bond 
exist, have happened and have been performed, and that the issue of bonds of 
which this is one, together with all other indebtedness of said Village, is 
within every debt and other limit prescribed by the Constitution and Laws of 
said State. 

IN WITNESS WHEREOF, the Village of Rye has caused this bond to be 
signed by its President and its Village Treasurer and the corporate seal of 



16 MUNICIPAL BONDS 

said Village to be hereunto affixed and attested by its Village Clerk and the 
coupons hereto attached to be authenticated with the facsimile signature of its 
Village Treasurer, and this bond to be dated December 1, 1921. 

President 
Village Treasurer 
ATTEST: 

Village Clerk 

(Corporate Seal) 

Form of Coupon 
No. $ 

The Village of Rye, a municipal corporation of the State of New York, 
will pay to the bearer on the first day of June, 1922, the sum of Twenty-five 
($25.) Dollars, in lawful money of the United States of America at the office 
of the Village Treasurer, being six months' interest then due on its Water 
Bond, dated December 1, 1921, bearing Number 1. 



Village Treasurer 



Conversion Certificate 



WE HEREBY CERTIFY that upon the presentation of the within bond 
with a written request by the owner thereof for its conversion into a registered 
bond, we have this day cut off and destroyed coupons attached thereto, num- 
bered from to inclusive, of the amount 

and value of Twenty-five ($25.) Dollars each, amounting in the aggregate to 

Dollars, and that the interest at the rate of five per centum (5%) 

per annum, payable semi-annually on June 1 and December 1 in each year, as 

was provided by the coupons, as well as the principal, is to be paid to 

legal representatives, successors or assigns, at 

the place stated in the coupons. 

Dated, , 19.... 

President 
Village Treasurer 
Village Clerk 

Registration Certificate 

IT IS HEREBY CERTIFIED that the within bond was this day registered 
in the name of the payee above named in the books kept in the office of the 
Village Clerk of the Village of Rye, and is transferable only upon presentation 
to said Clerk with a written assignment duly acknowledged or proved, at 
which time the name of the assignee shall be entered hereon and in said books 
by said Clerk. 

IN WITNESS WHEREOF, I have hereunto set my hand and official seal 

this day of , 19. . . . 

Village Clerk 



This Bond is Registered as Follows. 



Date of 

Registration 



Name of 
Registered Holder 



Village 
Clerk 



THE MUNICIPAL BOND 



17 



Form of New York Registered Bond 

No. 1 $1000 

UNITED STATES OF AMERICA, STATE OF NEW YORK, 

COUNTY OF ROCKLAND, VILLAGE OF SUFFERN 

PAVING BOND 

The Village of Suffern, a municipal corporation of the State of New York, 
hereby acknowledges itself indebted and for value received promises to pay 
to John Doe, legal representatives, successors or assigns, the sum of One Thou- 
sand Dollars ($1000) on the first day of December, 1922, with interest thereon 
from the date hereof at the rate of five per centum (5%) per annum, payable 
semi-annually on June 1 and December 1 in each year until this bond matures. 
Both principal and interest of this bond are payable in lawful money of the 
United States of America at the office of the Village Treasurer. 

This bond is registered on the books of the village clerk and is transferable 
only upon presentation to such clerk with a written assignment duly acknowl- 
edged or proved. Upon presentation of this bond with such an assignment the 
clerk will note such transfer on this bond and on said books. 

This bond is one of an issue of $10,000 bonds of like date and tenor, except 
as to denomination and maturity, numbered from 1 to 10 inclusive, issued pur- 
suant to the provisions of the Village Law, constituting Chapter 64 of the 
Consolidated Laws of the State of New York, and a proposition duly adopted 
at an election held in said village November 8, 1921, and a resolution of the 
Board of Trustees of said village adopted November 10, 1921. 

It is hereby certified and recited that all conditions, acts and things re- 
quired by the constitution and statutes of the State of New York to exist, to 
have happened and to be performed precedent to and in the issuance of this 
bond, exist, have happened and have been performed, and that the issue of 
bonds of which this is one, together with all other indebtedness of said village, 
is within every debt and other limit prescribed by the constitution and laws of 
said state. 

IN WITNESS WHEREOF, the village of Suffern has caused this bond to 
be signed by its President and its Village Treasurer, and the corporate seal of 
said Village to be hereunto affixed and attested by its Village Clerk this first 
day of December, 1921. 

President 
Village Treasurer 
ATTEST: 

Village Clerk 
(Corporate Seal) 

Form for Registration 

This bond is registered as follows: 



Date of 
Registry 


Name of 
Registered Owner 


Village 
Clerk 



























Chapter III 
MUNICIPAL CORPORATIONS 

Definition. — A corporation is a legal person, perfectly dis- \ 
tinct from the members which compose it, having a special 
name and having such powers and such only, as the law pre- 
scribes. As Lord Coke says, it is "invisible, immortal, 
having no conscience or soul." A corporation can sue and 
be sued, have a common seal and have a continuous legal 
existence. A municipal corporation consists of the inhabitants 
of a given area constituted by the sovereign a body politic 
and corporate for the purposes of local government. Essen- 
tially its corporate character or virtus does not differ from 
that of a corporation as usually defined. The difference is 
in the powers granted by charter. And we hear so much of 
civic righteousness and civic conscience that we are con- 
strained to think municipal corporations must have a soul. 

A municipality is a creature of the State or sovereign. 
As Governor Miller said in an address to a delegation of New 
York City business men on March 15, 1921 : 

There has been a good deal of talk about home rule with respect to this 
and other subjects and it has been made a sort of a fetish to cover misrule and 
misgovernment, and the people who are talking of it with respect to the mu- 
nicipalities of the State are looking at it from an entirely wrong angle. 

The municipalities have been created by the State. They are the mere 
creatures of the State as agencies for local administration, and their justifica- 
tion or excuse for the exercise of power stops at the point where they cease to 
be able effectively and efficiently to handle the problems. 

The welfare of the entire State is intimately bound up in the welfare of the 
City of New York. Now, the State has a responsibility which it cannot shirk. 
I believe in the very greatest measure possible for local self-government, and 
by that I mean of municipal local self-government, and by "possible" I mean 
the greatest measure that is compatible with good government; but the pur- 
pose of these municipal governments is to administer their functions in the 
interest of the people, and when they cease to be able to do that in reference 
to any given matter they cease to have any case whatever to support an argu- 
ment for home rule, in my judgment. 1 

Municipalities subject to legislature of State. — These or- 
ganizations are, of course, subject to the legislature of the 

x New York Evening Post, March 15, 1921. 

18 



MUNICIPAL CORPORATIONS 19 

State, and their acts, if they violate the law or affect private 
rights, are also subject to judicial cognizance and judgment. 
They are under the law and are bound to obey it. While the 
community is entitled to local government, it cannot claim, 
as against the State, any particular charter or form of local 
government. 

The constitution of each State contains provisions in- 
tended to make clear the principle of legislative control of 
municipalities, and to limit legislative interference. Thus in 
the constitution of New York State we find: 

"It shall be the duty of the legislature to provide for the 
organization of cities and incorporated villages"; 2 and "Cor- 
porations may be formed under general laws; but shall not 
be created by special act, except for municipal purposes, and 
in cases where, in the judgment of the legislature, the objects 
of the corporation cannot be attained under general laws. 
All general laws and special acts passed pursuant to this sec- 
tion may be altered from time to time or repealed." 3 

The reservation of power in this last sentence was ren- 
dered necessary by the Dartmouth College case 4 and is found 
in practically all, if not all, State constitutions. 

The legislature of New York, pursuant to the mandate to 
"provide for the organization of cities and incorporated vil- 
lages," has provided uniform charters for second-class cities 5 
(in such a defective way that each second-class city has been 
obliged to obtain a supplementary charter), villages, 6 and 
towns. 7 

The constitution of New Jersey directs the legislature to 
provide general laws to regulate "the internal affairs of 
towns, and counties" ; and prohibits the passage of private, 
local or special laws. 8 Town by judicial construction includes 
cities, boroughs and villages. Despite the prohibition, spe- 
cial acts are numerous, masquerading as general laws, and 
"ripper" bills mark each legislative session. 

It is one of the fundamental principles of constitutional 
government that the legislature of a State cannot delegate the 

2 Art. XII, Sec. 1. 

8 Art. VIII, Sec. 1. 

4 Dartmouth College v. Woodward, 4 Wheat. (U. S.) 518. 

6 Cons. Laws, Chap. 53. 

6 Cons. Laws, Chap. 64. 

' Cons. Laws, Chap. 62. 

8 Art. IV, Sec. VII, sub. 2, 



20 MUNICIPAL BONDS 

power to make laws, which has been entrusted to it by the peo- 
ple, but the creation of municipalities exercising local self- 
government has never been held to trench upon that rule. 

Creation of municipalities. — Municipalities may be 
created by special charter, which are their "articles of incor- 
poration," stating the name, defining the territorial limits, 
limiting the electorate and granting powers of government. 
Such charter may be and frequently is amended, altered or re- 
pealed. For an example of what is ordinarily known as a 
"scissors and paste charter," the reader is referred to that 
remarkable document known as the Charter of the City of 
Cohoes, 9 the fiscal provisions of which are about as clear as 
the narrative of the Mormon bible. 

Municipalities may be created pursuant to general laws. 
Thus in New York State a number of people, living in a 
limited area, may, by taking proper proceedings, form a 
village, 10 and in many jurisdictions cities may be so formed. 

In New Jersey, boroughs (resembling villages in most 
States) are ordinarily incorporated, or chartered, by the leg- 
islature. The statute gives a name and defines the bound- 
aries of the borough, which then becomes subject to and 
obtains its grant of powers from the Borough Law X1 and the 
Act concerning Municipalities. 12 

Many jurisdictions have codes or general statutes apply- 
ing to all municipalities or all of a certain class, such as all 
cities in New Jersey and in New York. 13 

In England, though not in this country, a municipal cor- 
poration may be such by prescription — that is, its corporate 
powers have been exercised so long that a charter is supposed 
to exist and it is assumed that it has been lost. Defacto 
corporations result when proceedings to incorporate under a 
general law have been defective. The State only can attack 
the validity of such incorporation. 

To sum up, we find that municipal corporations are 
created or come into existence by: 
Special charter or 
Incorporation under general laws; 

9 P. L. 1915, p. 353. 

10 Cons. Laws, Chap. 64. 
"P. L. 1897, p. 285. 
"P. L. 1917, p. 319. 

"P. L. 1917, p. 319; Cons. Laws, Chap. 21, 53. 



MUNICIPAL CORPORATIONS 21 

Prescription; and, through a failure properly to in- 
corporate, a 
Defacto municipal corporation. 
Powers and functions of municipal corporations. — A 
municipal corporation possesses and can exercise the follow- 
ing powers and no others. First, those granted in express 
words; second, those necessarily or fairly implied in or inci- 
dent to the powers expressly granted; third, those essential 
to the accomplishment of the declared objects and purposes 
of the corporation — not simply convenient, but indispensable. 
Any fair, reasonable, substantial doubt concerning the exist- 
ence of power is resolved against the corporation, and the 
power is denied. These principles are of transcendent impor- 
tance and lie at the foundation of the law of municipal cor- 
porations. An essential power would seem to be implied, if 
not expressly granted, so we may say that the powers of a 
municipal corporation are : 

(a) Express — as the power to govern through specified 
officers and agents, and 

(b) Implied — as the power to acquire a city hall or 
place to house such officers and agents must be, if not ex- 
pressly granted. 

Within the scope of our topic, we may illustrate by say- 
ing that the power to construct or acquire a water system is 
(almost always as to cities) expressly granted, and to pay for 
such system the power to borrow money may be implied, if 
not expressly granted. We will find later that power to bor- 
row, whether expressed or implied, does not, according to the 
weight of authority, carry with it the power to issue or "emit" 
negotiable instruments, which, as we have seen, possess cer- 
tain very interesting characteristics. 

The essential branches of the power of the State which 
may be expressly granted by legislation to the municipality 
are: 

(1) The police power, which does not mean alone the 
power of uniformed policemen but includes the right to make 
regulations necessary to the health, safety, welfare and com- 
fort of the community; 

(2) The power of taxation, with which we are directly 
concerned and which need not be further defined at this time ; 
and 

(3) The power of eminent domain, which in brief means 



22 MUNICIPAL BONDS 

the right (by appropriate legal proceedings) to take private 
property such as land, for public purposes such as parks, 
upon making proper compensation to the owner. 

Many if not all of such powers may be exercised by a 
municipal corporation in one of two different capacities, 
that is 

(a) Governmental, legislative or public, or 

(b) Proprietary or private. 

The distinction is not easy to define and it will answer our 
purpose to say that governmental powers are political, to be 
exercised for the public good on behalf of the State, such as 
the power to maintain order and the public peace; and that 
proprietary pow-ers are similar to those exercised by a busi- 
ness corporation over its property, such as the right to collect 
payment for water sold consumers, or to operate any public 
utility. 

Classification. — The term municipal corporation is general 
and is not always accurately applied. The legislature may 
call a county a municipal corporation as in New York 14 or 
a "body politic and corporate" as in New Jersey. 15 Gen- 
erally speaking, we mean all municipal or quasi municipal 
bodies, or even school or taxing districts. These have various 
names, broadly and usually not accurately descriptive of their 
functions : 

(a) Counties are in a class by themselves as they are 
in reality major political subdivisions of the State. They are 
not in all States corporations, but the distinction between them 
and municipal corporations is mainly of governmental and 
historical significance. 

(b) True municipal corporations, possessing in greater 
or lesser degree all the functions of local government and all 
the attributes of municipal corporations, are: 

Cities, and sometimes 
Towns, 
Townships, 
Villages and 
Boroughs. 

(c) Quasi municipal corporations, best described as 
local taxing districts with administrative powers presumably 
adequate for the purpose for which they are created, are : 

"Cons. Laws, Chap. 24. 

15 An Act concerning counties, P. L. 1918, p. 567. 



MUNICIPAL CORPORATIONS 23 

School districts. 

Road, sewer, fire, etc., districts. 

Drainage, irrigation or levee districts. 
Frequently, if not always, the districts classified as quasi 
municipal corporations are co-extensive or practically so, or 
are included within true municipal corporations. A city may 
be and frequently is a school district and in it, overlapping 
each other, may be park, sewer and other taxing areas, or 
quasi municipal corporations. The consequences of this over- 
lapping will be considered hereafter. 

The distinction between municipalities is of importance 
in determining the valuation of securities, and is considered 
further in other chapters. 



Chapter IV 
MUNICIPAL PROPERTY AND IMPROVEMENTS 

The history of the human race is the history of its cities. 
— Earliest recorded history is not only an account of wars 
and conquests; it is a record of co-operative undertakings. 
When we contemplate the pyramids and temples of Egypt, 
we are lost in admiration of their extent and magnificence 
and the human endeavor necessary to create such works. Our 
admiration may be qualified by a knowledge that the work- 
men were slaves and that the money was wrung from a peas- 
antry by absolute monarchs. Yet there is a co-operation 
discernible, even if enforced. 

We think of the Romans as road builders. Wherever 
Roman civilization extended, the paved causeway led from 
Rome to the outposts of that civilization. Bridges were nec- 
essary incidents. It is an interesting comment in passing that 
the spiritual head of the visible church takes one of his titles 
from the historic function of bridge building. The Pontifex 
Maximus was an important official of Ancient Rome and the 
Popes have succeeded to that title. 

Hebrew history recalls the common endeavor headed by 
Sanballat to rebuild the shattered walls of Jerusalem after 
the captivity. There is, however, no evidence that the Jewish 
money lenders dealt in municipal bonds issued to provide 
funds for the purpose. 

As civilization advanced, as human beings congregated, 
pure and plentiful water was found to be a necessity. Thence 
arose great systems of aqueducts. One with which we are 
all familiar, under the name of the Pont du Garde, crosses 
the Pontine Marshes to Rome. The great sewer supplement- 
ing the Tiber, known as the Cloaca Maxima, and the public 
baths, objects of daily resort of the aristocrat as well as the 
plebeian, still remain the wonder of the tourist. 

With the spread of Christianity, necessarily came the 
thought of responsibility for others. Hence arose, growing 

24 



MUNICIPAL PROPERTY AND IMPROVEMENTS 25, 

out of the monastic institutions, hospitals for the sick and 
asylums for the mentally and physically incompetent. 

It is interesting (though not important) to observe that 
what the individual once did for himself, the municipality is 
now doing for him. The nearest lake or river provided a 
bathing place for primitive man. The Romans understood 
the necessity for public baths and provided them. After a 
hiatus in personal cleanliness for many centuries, the modern 
city erects public baths, and every residence is provided with 
more or less adequate facilities for bathing. Co-operation 
makes possible any number of things which the unaided indi- 
vidual would have difficulty in obtaining. So the public de- 
mand for improvements is each year carrying our munici- 
palities farther along the road to socialism. 

Municipal expenditures. — A municipality may expend its 
money only for a public purpose. What is a public purpose 
may not always be easy to determine but when determined it 
constitutes the limits of the power of taxation. The State 
legislature can neither compel nor authorize a municipal cor- 
poration to expend any of its funds for a private purpose and 
consequently, since practically every undertaking of a mu- 
nicipality does or may require the expenditure of money, a 
municipal corporation cannot, even with express legislative 
sanction, embark on any private enterprise or assume any 
function which is not public in a legal sense. If a specific 
provision prohibiting the expenditure of public funds for 
private purposes is required, it is found in the clauses of most 
State constitutions which forbid the taking of property for 
other than public uses; for since the funds of a municipality are 
necessarily directly or indirectly raised by taxation, the expendi- 
ture of money by a municipality for private purposes does or 
may necessarily result in the taking of property under the guise 
of taxation for other than public uses. It can make no dif- 
ference that the payment is to be made out of borrowed 
money and that no immediate provision for taxation is made. 

But the power of a municipality under legislative authority 
to expend funds raised by taxation upon public institutions, 
such as hospitals and schools which are owned, operated and 
controlled by the municipality, is unquestioned. Subject to 
constitutional restrictions, it is within the power of the legis- 
lature of a State to ascertain how the public burdens are to 
be borne. 



26 MUNICIPAL BONDS 

As to what constitutes a public or municipal purpose (the 
terms are not necessarily synonymous) the decisions of the 
courts and the statutes are not uniform. It must, however, \ 
be for the benefit and use of the municipality itself. More 
specifically it has been said that a municipal purpose must 
concern primarily the benefit, use, or convenience of a munici- 
pality as distinguished from that of the public outside of it, 
and that it must be within the ordinary range of municipal 
action. 1 

Municipal expenditures are of two kinds: first, for run- 
ning expenses; and second, for capital expenditures. 

Running expenses. — By running expenses is meant expen- 
ditures for salaries, maintenance of property, cleaning streets, 
and the numerous duties which must continually be performed 
to keep the city moving. 

Capital expenditures. — When property is to be acquired, 
or a building constructed, the expenditure of money is a capi- 
tal expense. The entire cost of such a project can be met 
with money raised by taxation in one or more years. But it 
is advisable, if the amount of money needed be large, to 
spread the expense over a period of years. Therefore, the 
funds to pay for property acquired for public purposes or 
public improvements are frequently borrowed. This may be 
necessary because the amount required is too great to be 
included in the annual budget and raised by tax in one year. 
A municipality whose annual running expenses are half a 
million dollars may, and frequently does, construct a water 
or sewer system costing four or five times that amount. The 
effect upon the tax rate if the larger sum should be included 
in the budget can be imagined and has been explained in 
Chapter I. As we have seen, when money is borrowed for a 
capital expenditure, it is secured by the issue and sale of 
bonds. 

Debt service. — Because of its importance, the author sug- 
gests debt service as a third division in the classification of 
municipal expenditures. By debt service, and it is a term we 
will frequently use, we mean the amount of money necessary 
each year to pay the interest on the public debt and to provide 
a fund for its redemption. This latter is usually the contri- 
bution to the sinking fund, but modern financing requires that 
funded debt be paid in annual installments, and in the debt 

1 ln re Mayor, etc. (1885), 99 N. Y., 569 at 590. 



MUNICIPAL PROPERTY AND IMPROVEMENTS 27 

service must be included the amount necessary to retire ma- 
turing obligations. 

All municipal expenditures are made by the municipality 
in one of its two capacities, governmental or proprietary, but 
the distinction is not important in this discussion. 

Acquisition of property. — By the immemorial usage of the 
country, it appears to be recognized that as an incident to the 
corporate powers of municipal corporations, they may pur- 
chase and hold property both real and personal. So also a 
municipal corporation has implied power to receive a gift of 
real estate for corporate purposes. As all corporations in 
this country are created by the legislature, they have only 
such powers as the legislature expressly confers and such as 
are necessarily or fairly incident thereto. 

The same doctrine applies to and measures the corporate 
capacity to receive all property. In the absence of express 
prohibitory statutes which in terms confer and limit, and 
therefore define and measure the power, the capacity to ac- 
quire and hold property (real and personal) must be fairly 
incidental to some power expressly granted and absolutely 
indispensable to the declared purposes of the corporation. 
Any greater right than this is not only not granted but is 
impliedly denied. 2 

Sound as these observations are, the principle is not always 
practically important because in many jurisdictions statutory 
grants of power are so large and so all-embracing that there is 
practically no limit to the power to acquire and hold property 
and construct improvements, except that the exercise of such 
power must be for a public purpose ; and the courts are gradu- 
ally extending the meaning of "public purposes." 

Methods of acquisition. — A municipal corporation ac- 
quires its property by purchase, by gift and by condemnation. 
These powers are usually conferred by express statute, that 
is either contained in the charter or exists in some enactment 
applicable to all municipalities of a certain class. 

Purchase and gift need no explanation. 

The power to condemn is the right to take private prop- 
erty on making to the owner compensation in the prescribed 
amount, for a designated municipal or public purpose. 

Limitations. — There are limitations on the exercise of such 
grants of power, besides the limitation that the power must 
2 Dillon, p. 1556. 



28 MUNICIPAL BONDS 

be exercised for public purposes. It is frequently required 
by statute that before a certain thing be done, the question of 
doing it must be submitted to a popular vote, or that if by 
ordinance or resolution the thing is directed to be done, a 
certain number of taxpaying electors may require a referen- 
dum. These limitations, however, are not so much limita- 
tions on the power as on the right to exercise or method of 
exercising the power. 

Public Improvements. — The power of a municipality to 
undertake public improvements is subject to the same qualifi- 
cations as its power to acquire public property. Its power to 
expend funds raised by taxation for works of internal im- 
provement that are located within its limits and constructed 
and controlled by its own officials is unquestioned. It may 
expend its funds in works of external improvement, if of a 
public character, and subject to legislative regulation and 
control. 

Statutory powers (Act concerning Municipalities in New 
Jersey). — The statutory powers of municipal corporations 
have been so greatly enlarged during the last few years, espe- 
cially in New Jersey and to a hardly less extent in New York, 
that a discussion of general principles is a discussion of par- 
ticular statutes. One of the best examples of such statutory 
grants is the Act concerning Municipalities in New Jersey. 3 

There is no power to acquire property or construct im- 
provements which a municipality in New Jersey ought prop- 
erly to have that is not granted by this statute. It is one of 
the best examples of codification and one of the best drafted 
statutes which we have, both in form and content. It must 
be read, as to the creation of funded debt, in connection with 
what is called the Pierson Bond Act. 4 Given the power to 
construct or acquire property or improvements by the Act 
Concerning Municipalities, the power to issue bonds is con- 
ferred by the Pierson Act. 

Second Class Cities Law in New York. — In New York a 
good example is the Second Class Cities Law which gives 
such cities the right to create a funded debt for any municipal 
purpose, but it leaves to other statutes and to some extent to 
general principles the determination of the question, "What 
is a municipal purpose?" The Village Law is an example of 

3 P. L. 1917, Chap. 152. 

4 P. L. 1917, Chap. 240, 



MUNICIPAL PROPERTY AND IMPROVEMENTS 29 

a statute giving somewhat limited powers and attempting to 
grant only such powers as should be exercised by a municipal 
corporation of that particular class. 

General rights of municipalities. — In general, municipal- 
ities have the right to construct public buildings even without 
express legislative authority and to provide a meeting place 
for the voters of the municipality if it is a pure democracy, 
such as a New England town, or for the municipal council 
if it has a representative form of government; in other words, 
it has the right to build a city or town hall. Express legisla- 
tive authority is, however, ordinarily found. 

Municipalities almost invariably are granted the power 
of extending, improving, and grading streets and highways 
within their respective limits. It has been held that power ■ 
to grade and improve its streets is an inherent corporate 
power. The construction of sewers and drains is a public 
and governmental function, and a municipal corporation may 
be required by the legislature to pay the cost of a sewerage 
system constructed without its consent. / 

A water supply is, of course, the most important requisite 
in a community of any size. The power of a municipal cor- 
poration, with legislative authority, to engage in the sale and 
distribution to its inhabitants for compensation, of a com- 
modity which is essential to wholesome, comfortable and con- 
venient living is well established, even if the business which 
is undertaken is one which can be, and ordinarily is, carried 
on by private capital. If it is an undertaking which cannot be 
carried on without the aid of some governmental franchise, 
such as the right of eminent domain, or the privilege of using 
the public streets for pipes and conduits, the appropriation of 
real estate for a water works may be authorized. In passing, 
we note that while there is no other distinction between water 
works operated by gravity and water works requiring pump- 
ing, the practical difference is important because of the small 
cost of operation of the former and the greater cost of opera- 
tion of the latter. 

Other activities. — Municipalities may acquire and main- 
tain public lighting plants and engage in the business of sup- 
plying light and electricity. They may be expressly author- 
ized by statute to erect public wharves and charge tolls for 
their use. The acquisition of parks and public places has long 
been recognized as a municipal function. Markets may be 



30 MUNICIPAL BONDS 

acquired and constructed, and libraries built and operated but 
in this latter case the statutory power must be closely scanned. 

While education is a function of the State and is generally 
recognized as such, the State, through the legislature, may 
impose upon the municipality the burden of constructing, 
operating and maintaining schools. It is to some extent the 
result of this theory that our public educational system is as 
good as it is, but out of the theory rises the extremely complex 
economic and political situation which we see illustrated by 
controversies between bodies with budget-making powers and 
boards of education. 

Municipalities may make improvements and expend their 
funds for works of a public character even if these works are 
not wholly within the territorial limits of the municipality, 
provided they are connected with municipal improvements. 

A city may be granted power to expend its funds in 
improving the navigation of a river upon which the munici- 
pality is situated, and we are familiar with the fact that the 
water supply of the City of New York extends northward 
through many cities and suburban communities to points 
geographically far removed from the city hall. There can be 
no doubt of the power of the legislature to authorize a munici- 
pal corporation to acquire the ownership of property outside 
its territorial limits, but this power must be expressly granted. 

Public utilities. — The ownership and operation of public 
utilities is a large subject upon which we need spend little 
time. It may be and frequently is a political issue. It should 
be noted that there is an important distinction between public 
ownership and public operation but in either event the power 
must come from the legislature and be clearly granted in 
express terms. 

Railroad aid as such is now fortunately forbidden by 
constitution and by statute, the enactment of such prohibi- 
tions resulting in most States from the abuses which occurred 
in the days of development and expansion following the Civil 
War. The power to own and operate street railroads is fre- 
quently given; for an illustration see the New Jersey Act 
concerning Municipalities. The exercise of such power is 
ordinarily made dependent upon a referendum of the tax- 
paying electors. 

Sale of commodities. — It does not often happen that mu- 
nicipalities desire to function as retail merchants but we all 



MUNICIPAL PROPERTY AND IMPROVEMENTS 31 

recall extensive operations of this character during the Great 
War. Most of such enterprises, namely the sale of govern- 
ment food products for the purpose of keeping down retail 
prices, were probably without authority of law, unless in some 
States statutes were hurriedly passed to permit the use of 
public places and public funds, and the participation of public 
officials. Most authorities agree that a municipal corporation 
cannot constitutionally be authorized by the legislature to 
engage in the business of selling and distributing the conven- 
iences or even the necessities of life if the business is of such 
a nature that it can be carried on by private individuals with- 
out the aid of any franchises from the State. 5 

Building houses. — The housing situation existing in the 
years 1919 and 1920 in the Eastern States created a demand 
that municipalities engage in the business of building houses. 
This, it is safe to say, they cannot do without express legis- 
lative authority and it is very questionable whether such leg- 
islative authority can constitutionally be given. 

In conclusion we may say: While the right of a munici- 
pality to acquire property and construct improvements may 
in some cases be inferred, the power is ordinarily given by 
express grant from the legislature. When the purpose for 
which a bond is issued appears to be unusual, for example to 
acquire a municipal graveyard, the statutes must be closely 
scanned. If the grant of power cannot be found, the infer- 
ence must be extremely clear that such power exists or the 
doubt must be resolved against the existence. Practically, 
we find grants of power sufficient for proper municipal func- 
tions, according to their kind. 
6 19 R. c. L., P . 719. 



Chapter V 
TAXATION AND LIMITATION OF TAXES 

Municipal bonds redeemed by taxation. — Municipal 
bonds, with relatively unimportant exceptions, are redeemed 
with money raised by one form or another of tax. Taxation 
is, therefore, one of the most important of the subjects with 
which we shall have to deal. 

Taxes denned. — Taxes, including assessments, are burdens 
or charges imposed either directly by the legislature, or under 
its authority, upon persons and property to raise money for 
public as distinguished from private purposes, or to accomplish 
some thing or object public in its nature. A public use or pur- 
pose is the raison d 'etre of a tax. The substantial foundation 
of the power is political, civil, or governmental necessity, and 
taxes are largely if not wholly sacrifices for the public good. 
A tax may also be defined as an enforced contribution of money 
or other property, assessed, in accordance with some reason- 
able rule of apportionment, by authority of a sovereign State, 
on persons or property within its jurisdiction, for the purpose 
of defraying the public expenses. A tax is an obligation im- 
posed upon citizens to pay the expenses of government and is 
in no way dependent upon the will or contract — express or 
implied — of the persons taxed. 

Taxation is the principal source of revenue by which munici- 
pal expenses are borne and debts and liabilities paid. The pri- 
mary form of tax in almost all of the States is the direct prop- 
erty tax levied at a uniform rate upon all the property, real or 
personal, within each city, town, or other civil unit or taxing 
district, and it is usually intended to reach all property taxable 
within the power of the State. 

The power to tax. — The power to tax is inherent in the 
sovereign, which for our purpose is the State. The power of 
the States and of their municipalities to levy taxes is subject to 
certain express and implied restrictions under the Federal Con- 
stitution. It is sufficient to say that the only restriction of 
interest is the provision that States shall not pass laws impair- 

32 



TAXATION AND LIMITATION OF TAXES 33 

ing the obligation of contracts. This is held to be a limitation 
upon the taxing power of the State. The right to tax is not 
granted by the constitution of a State, but of necessity underlies 
it because a government could not exist or perform its functions 
without it. While it may be regulated and limited by the con- 
stitution, it exists without express grant in words, as a neces- 
sary attribute of sovereignty. The provisions of the State con- 
stitutions, which relate to the power of taxation, do not operate 
as grants of the power of taxation to the governments thus set 
up but constitute limitations upon a power which would other- 
wise be without limit. 

The power to tax is exercised by the legislature either 
directly through the passage of laws for the raising of revenues 
for support of the commonwealth, or indirectly by delegation 
to the municipalities or local taxing boards. Subject to con- 
stitutional restrictions, it is within the power of the legisla- 
ture of a State to ascertain the public burdens to be borne 
and the persons or classes of persons who ought to bear them 
and its determination, within the limits of the constitution, 
is not judicially reviewable. Stated somewhat differently, we 
may say that the work of deciding what money shall be raised 
by taxation and what properties or privileges or occupations 
shall be taxed rests exclusively with the legislature without 
any limitations except such as are imposed by express con- 
stitutional provisions. 

"The power of taxation being legislative, all the inci- 
dents are within the control of the legislature. The purposes 
for which a tax should be levied; the extent of taxation; the 
apportionment of the tax; upon what property or class of 
persons the tax shall operate; whether the tax shall be gen- 
eral or limited to a particular locality; and in the latter case, 
the fixing of a district of assessment; the method of collec- 
tion, and whether the tax shall be a charge upon both person 
and property, or only on the land, are matters within the 
discretion of the legislature and in respect to which its deter- 
mination is final." 1 

A municipal corporation established by the legislature 
cannot exercise the power of taxation without legislative 
authority. This is subject to the qualification that the au- 
thority of a municipality to tax is sometimes implied. For 
example, if the power to issue securities is given by statute, it 

1 Genet v. City of Brooklyn (1885), 99 N. Y. 296 at 306. 



34 MUNICIPAL BONDS 

has been held by the United States Supreme Court that the 
power to tax to obtain funds to pay the interest and principal 
of maturing bonds may be implied. 2 That court has declared 
that if a municipal corporation is authorized to issue bonds it 
must levy a tax therefor unless the power be plainly and 
unmistakably negatived by the statutes authorizing the bonds; 
that is, it must exist by unmistakable implication. 3 It cannot 
be collected by doubtful inferences from other powers or 
powers relating to other subjects nor can it be deduced from 
any consideration of convenience or advantage. 

Delegation of power. — The legislative branch of the gov- 
ernment may delegate the power to tax to municipal corpora- 
tions, but the. power to tax cannot be delegated except for 
public purposes. In the absence of a constitutional restric- 
tion, the legislature may confer the taxing power upon mu- 
nicipalities in such measure as it deems expedient, in other 
words, with such limitations as it sees fit as to the rate of 
taxation, the public purposes for which the taxation is author- 
ized, and the objects (the persons, business and property) 
which shall be subject to taxation. 

It is well settled in most jurisdictions that the taxing 
power may be delegated to a district having very embryonic 
or no governmental functions, such as an irrigation, fire, or 
sewer district. This is true in most States but it is not true 
in New Jersey because of the constitutional restriction dis- 
cussed in the Passaic Valley Sewer Case. 4 

"Public purpose" the boundary of taxation. — Taxes may 
be levied only for a public purpose. The definition of a pub- 
lic use or purpose is not easy. It has been defined in New 
York as follows: "The terms 'public or municipal purpose' 
and 'general welfare,' as used in this article, shall each include 
the promotion of education, art, beauty, charity, amusement, 
recreation, health, safety, comfort and convenience," etc. 5 

If a public purpose is not always easy to determine, it 
constitutes, when determined, the boundary of the power of 
taxation. As stated above, a public use or purpose is the 
essence of a tax. It is a well settled principle of constitu- 
tional law that no tax can be levied except for the purpose 

2 Dillon, p. 2398. 

3 United States v. New Orleans (1878), 98 U. S. 381; Ralls County v. 
United States (1881), 105 U. S. 733. 

4 Van Cleve v. Passaic Valley, etc. (1905), 71 N. J. L. 574; 60 Atl. 214. 
6 Cons. Laws, Chap. 31. 



TAXATION AND LIMITATION OF TAXES 35 

of raising money which is to be expended for the public use. 
To justify any exercise of the taxing power, the expenditure 
which it is intended to meet must be for some public service 
or some object which concerns the public welfare. This prin- 
ciple is fundamental and underlies all government that is 
based on reason rather than force. 

It is said that levying a tax for a purpose not public is most 
obviously objectionable as it is taking the property of the per- 
son assessed without due process of law. Since such a burden 
is not a tax, to impose it is a mere spoliation of the individual 
without the sanction of any of the precedents which constitute 
due process of law. The application of the principle that taxes 
can be levied only for the public use extends far beyond the 
mere denial of the right to collect a tax which has been levied 
for a private purpose. The right to tax depends upon the ulti- 
mate use, purpose and object for which the fund is raised. 
This principle may accordingly be invoked by a taxpayer to 
prevent the expenditure of funds which have been or are to 
be raised by taxation for purposes not public and is a weapon 
which may be used to advantage. 

If taxes cannot be imposed for a certain purpose, money 
already in the treasury cannot be appropriated for that pur- 
pose, and if taxes cannot be levied, bonds cannot ordinarily 
be issued. 

A test of the right of taxation. — Perhaps the best test of 
the right of taxation is to ask whether the proceeds of the tax 
are to be used for the support of government or for some of 
the recognized objects of government, or directly to promote 
the welfare of the community. A purpose from the attain- 
ment of which will flow some benefit or convenience to the 
public is a public use. 6 

Classification of taxes. — Taxes have been classified by text 
writers as follows : 

(a) Capitation or poll. 

(b) Property, in which are included general taxes and 
assessments. 

(c) Excise. 

(d) Income. 

Poll taxes. — A capitation or poll tax is one of a fixed 
amount operating upon all persons, or all persons of a certain 
class, resident within a specified territory, without regard to 

«26 R. C. L., p. 46. 



36 MUNICIPAL BONDS 

their property or the occupation in which they may be 
engaged. 

Property tax. — A property tax is the form most familiar 
to us and is ordinarily reckoned on the amount of property 
owned by the taxpayer on a given day and not on the total 
amount owned by him during the year, and it is ordinarily 
assessed at stated periods determined in advance and collected 
at appointed times. A tax computed upon the valuation of 
property, such as the value of one's dwelling, is considered 
a property tax. 

A general property tax is laid on all the property, or all 
the property of a certain class, located within a specified ter- 
ritory, for the purpose of defraying the public expenses of 
that territory. Such a tax is based upon the theory that a 
certain amount of money must be raised to maintain the 
municipal government. 

A special assessment, on the other hand, is laid upon 
property specially benefited by a local improvement in pro- 
portion to the benefit, for the purpose of defraying the cost 
of the improvement. It proceeds upon the theory that when 
a local improvement enhances the value of neighbouring prop- 
erty, it is reasonable and just for the legislature to provide 
that such property shall pay for the improvement. In a gen- 
eral levy of taxes, the contribution is exacted in return for 
the general benefits of government; in special assessments, 
the contribution is exacted because the property of a taxpayer 
is considered by the legislature to be benefited over and 
beyond the general benefit to the community. We find spe- 
cial assessments frequently levied for such improvements as 
grading and paving streets and sidewalks, constructing drains, 
sewers, and the like. 

Excises. — An excise has come to mean every form of taxa- 
tion which is not a burden laid directly upon persons or prop- 
erty, including every form or charge imposed by public 
authority for the purpose of raising revenue, upon the per- 
formance of an act, the enjoyment of a privilege, or the en- 
gaging in an occupation. 7 A chauffeur's license fee is a fa- 
miliar illustration, as it is imposed directly by the legislature 
without assessment. 

Income taxes. — Income taxes are of importance to the 
investor, as we shall see later, but only as to the income 

T 26 R. C. I*, p. 34. 



TAXATION AND LIMITATION OF TAXES 37 

derived therefrom and not as supporting the bonds. 8 As 
municipal bonds are not supported by income taxes, except in 
States which apportion and return to the municipality a part 
of the tax raised within it, in which cases the support is indi- 
rect, nothing further need be said at this point. 

Debt service. — The interest on bonds and the money to 
pay the maturing installments of principal, or to provide the 
annual contributions to a sinking fund, is raised by tax and 
is called "debt service." Such tax should be a direct, ad 
valorem, real property tax, for no other form of taxation is 
sufficient protection for the bondholder. The reason for this 
is that the principal source of revenue of all civil divisions is 
such a tax on real property. Assessed valuations of real prop- 
erty tend to increase from year to year and not to decrease 
or fluctuate. A marked decrease in valuations may be a 
danger signal, and its cause should be investigated. The 
amount of a direct real property tax can be quite accurately 
estimated in advance, as can the amount or percentage of the 
tax which will be collected. The amount of tax which can 
be collected from personal property, or derived from income 
or poll taxes, tends to fluctuate, is small in amount as com- 
pared with the real property tax, and is not a dependable 
source of municipal income. 

Taxation clause generally provides for payment of princi- 
pal and interest. — Most statutes authorizing the issue of 
bonds by municipalities provide for the raising by taxation of 
sufficient funds to pay the principal and annual interest on the 
bonds. In New York, for example, the General Municipal 
Law 9 provides that every ordinance or resolution providing 
for the issue of bonds shall provide for a sufficient tax to pay 
the interest and maturing principal. In New Jersey, the Pier- 
son Budget Act 10 in section 12, sub-division f, makes it man- 
datory upon the municipality, county, or school district, to 
include within the budget appropriations for the year a suf- 
ficient amount to meet sinking fund requirements and to pay 
bonds falling due within such year — which amount, of course, 
includes requirements for interest. It may be said that very 
few statutes which authorize the issue of bonds fail to pro- 
vide for a sufficient tax, and that where specific provision is 

8 Chapter on Taxation of Bonds. 
8 Cons. Laws, Chap. 24. 
10 P. L. 1917, p. 548. 



38 MUNICIPAL BONDS 

not made in the statute itself, adequate provision is usually 
made by general laws. There are, however, exceptions. 

Taxation provisions important to bondholder. — The 
bondholder must consider to what extent the statutes have 
conferred upon or denied to the municipality the general 
powers of taxation; for the courts are powerless to grant a 
remedy when the laws fail to provide for a sufficient levy or 
when taxation is restricted to such an extent as to make it 
insufficient. The courts have not the power to levy or collect 
taxes but may simply issue writs for the performance of these 
duties and coerce the proper officials when they exist and are 
to be found. 11 The extent to which the taxing power must 
be and the extent to which it may be exercised are most im- 
portant considerations in purchasing municipal bonds. 12 It 
is well, therefore, to know that bonds are supported by the 
full taxing power of the municipality without limitations or 
restrictions. 

Limitation on taxes. — In New York State, there is no 
limit upon the tax for debt service. The constitution con- 
tains the following limitation: 13 "The amount hereafter to 
be raised by tax for county or State purposes, in any county 
containing a city of over one hundred thousand inhabitants, 
or in any such city of this State, in addition to providing for 
the principal and interest of existing debt, shall not in the 
aggregate exceed in any one year two per centum of the 
assessed valuation of the real and personal estate of such 
county or city, to be ascertained as prescribed in this section 
in respect to county or city debt." The clause "in addition 
to providing for the principal and interest of existing debt" 
is regarded as constantly in force and to relate to new debt 
as well as old debt. While there is a limitation on taxation 
for general purposes in cities of over one hundred thousand 
inhabitants, the limitation does not apply to debt service. 
There is no statutory limitation in New York on taxes for 
debt service. In New Jersey, there is no constitutional or 
statutory limitation on taxation for debt service. 

The Smith One Per Cent Law. — In many other States, we 
find limitations on taxation for debt service, as in Ohio, con- 
tained in what is known as the Smith One Per Cent Law. 

"Chamberlain, p. 189. 
12 Chamberlain, p. 187. 
"Art. VIII, Sec. 10. 



TAXATION AND LIMITATION OF TAXES 39 

(Code: §5649.) Such limitations on taxation for the pay- 
ment of funded debt in that State have been modified by the 
new Ohio Bond Law, effective January 1, 1922. 

In an article by Raymond C. Atkinson of Western Re- 
serve University, entitled: "The Effects of Tax Limitation in 
Ohio Cities," printed in the National Municipal Review for 
December, 1920, there is a very concise and illuminating dis- 
cussion of the effect of the Smith One Per Cent Law. It is 
interesting to note that the supreme court of Ohio in 1916, 
according to Prof. Atkinson, "definitely declared that full 
provision for interest and debt retirement takes precedence 
over all other expenditures." This is the reverse of the gen- 
eral rule. 

Prof. Atkinson states that in 1917 "if all cities had met 
the interest on their bonds and. the entire cost of debt retire- 
ment from taxation, debt charges alone would have exceeded 
the total tax revenue of the 80 cities of Ohio by $180,000. 
* * * Cities were confronted with the alternative of re- 
funding their bonds as they fell due or of borrowing money 
for running expenses. The large cities compromised by doing 
both. In that way immense floating debts were incurred 
which cities were utterly incapable of paying, and the legis- 
lature was forced to authorize the issuance of deficiency 
bonds." 

The Gardner Act. — Some relief was afforded by the so- 
called Gardner Act, which allowed taxing districts by popular 
vote to place their interest and sinking fund charges outside 
the 15-mill limit, but the Gardner Act is only a makeshift 
remedy at best. 

"Fifteen mills may seem an adequate provision for mu- 
nicipal revenue, but it must not be forgotten that the city is 
only one of several agencies of government among which the 
15 mills is parcelled out. The apportionment of the tax rate 
is entrusted to a county budget commission consisting of the 
auditor, treasurer, and prosecuting attorney — all county of- 
ficials. The requirements of the State are first provided for, 
and needless to say, the budget commissioners see that the 
county receives second consideration. The requests of the 
school board usually come next in the order of preference, 
while the city, library board and other agencies of govern- 
ment have to be content with what remains." 

Argument against any tax limit. — That limitations on 



40 MUNICIPAL BONDS 

taxation for general purposes are vicious, is to some extent 
a matter of debate. Among the arguments that may be 
urged against municipal tax limits are the following: 

The object of a limit on taxation for current expenses is 
sufficiently provided for by the accountability of the munici- 
pal authorities to their constituents. In the event of the city 
government being extravagant the taxpayers have ample 
power to apply, and will apply, the necessary check by refus- 
ing to re-elect the members responsible for such extravagance. 
Owing to the difference of conditions in various cities, and 
owing to the fact that a situation may be created from time 
to time, which would make a limit that was proper for one 
year absolutely improper for another year, it is not practi- 
cable to fix upon a general tax limit for all cities. One of the 
results of limitations on taxation for current expenses is that 
municipalities issue long-term bonds for current expenses, in 
order to avoid the limitation. This evil exists even where 
the tax limit applies to bonds as well as to current expenses, 
because the taxation to pay the bonds is, of course, spread 
over a period of years. 

In an article by Mr. H. G. Loeffler, appearing in the 
National Municipal Review, entitled, "Municipal Tax Limits 
and Economy," it is said: "Where limits prevail, one of 
three things happens. The cities bring pressure to bear until 
the limit is raised, or they resort to continued court action 
until a satisfactory decree is obtained from the judiciary, or 
they fund the amount needed over future years by bonding. 
It is certain that the elected officials will do all in their power 
to satisfy the growing demands of the public. Experience 
seems to indicate that heretofore they have been successful, 
laws notwithstanding. 

"There is only one way out of this situation after tax 
limits are abolished. That way lies along the lines of an 
efficient budget system. Make this system a picture of the 
services demanded from the government. Center the respon- 
sibility for the administration of it in one single elected 
official. Place on the statute books a bonding act which will 
not allow the cities to follow an unsound borrowing policy 
such as is being forced on many of them now by tax limits 
and special bonding laws. 

"It is felt that if a process such as this is worked out, 
limitations of tax levies will be uncalled for. The State laws 



TAXATION AND LIMITATION OF TAXES 41 

will not then be productive of vicious bonding. In the budget 
the public will see the result financially of any new or extended 
governmental service demanded. If they feel that this new 
activity is worth the cost, let them so decide. The power will 
then rest where it should and tax limits will be unnecessary." 

Arguments against any tax limits on debt service. — The 
object of a tax limit applicable to municipalities is sufficiently 
provided for by a limit on the amount of bonds that may be 
issued. No limit should be placed on the power of the mu- 
nicipal debtor to pay its debt. It is immoral not to pay debts. 
A tax limit that applies to municipal bonds injuriously affects 
municipal credit and tends to make bonds unmarketable. If 
the whole of the tax that could be levied within the limitation 
should be needed to pay the principal and interest of bonds, 
and the assessed valuation of property should be reduced so 
that the tax would be insufficient to pay all the bonds, the 
holders of the bonds first issued would have no better rights 
than the holders of the last bonds issued. Bonds subject to 
a tax limit will not be accepted by the board of trustees of 
the Postal Savings system nor by some of the large insurance 
companies. 

Revenue. — Taxes are not the only source from which 
municipalities derive funds. Moneys coming from any other 
sources such as water rents, surplus earnings (if any) from 
other public utilities, the municipal share of certain State 
taxes, which may be considerable in amount, are usually des- 
ignated as "revenue." These are so uncertain and are rela- 
tively so unimportant that the bondholder is not especially 
concerned and the careful buyer of municipal securities will 
not attach much importance to them. 



Chapter VI 
MUNICIPAL BORROWING 

The power to incur indebtedness. — Every business cor- 
poration has the privilege of borrowing money to carry out 
the powers granted to it in its charter. It does not follow 
that this is equally true of municipal corporations. The power 
is sometimes implied but is closely watched by the courts, and 
as it is apt to be subject to judicial review, the courts have 
had more opportunity to limit the power than in the case of 
the moneyed or business corporation. 

The power to borrow is usually given in express language, 
in which case the terms and purposes of the grant will meas- 
ure its extent. If the power is not expressly conferred, does 
it, asks Judge Dillon, exist by implication? "The question 
of the incidental authority of municipal corporations to bor- 
row money has often been considered and often decided, but 
the decisions are not uniform or reconcileable as to the extent 
or even existence of such authority. In view of the legisla- 
tive practice to confer, in terms, all powers so important as 
this, the dangerous nature of this power, by reason of the 
temptation it holds out to incur needless debts and to make ex- 
travagant expenditures, and the facilities it offers for frauds, 
and the settled and salutary doctrine that such corporations 
have no powers but such as are expressly conferred, and those 
which are necessary to effect the objects of the corporation, 
and those which are incidental to the express grants where 
the legislative will is wholly silent," Judge Dillon "is strongly 
inclined to deny the existence of a general implied or general 
incidental power to borrow money, or much less to issue 
negotiable paper." 1 

"The power to borrow money is, in a certain sense, a 
larger power than that of raising money by taxation. The 
resistance of the parties taxed is, in the nature of the thing, 
an immediate check to taxation, which does not exist in the 
case of a power to borrow, for the immediate burden of a 
1 Dillon, p. 522. 

42 



MUNICIPAL BORROWING 43 

loan is but slightly felt. Therefore the power to borrow 
money should not be inferred from any of the ordinary 
powers conferred in the charters of municipal corporations, 
and under ordinary circumstances such a power can proceed 
only from an express grant to that effect." 2 

Summary of Judge Dillon's views. — The following is a 
summary of Judge Dillon's views: 3 Whether there is power 
in a municipal corporation to borrow money or to issue nego- 
tiable paper or to do both depends upon the legislative intent, 
to be collected from statutes, general and special, applicable 
to the municipality or to the particular case. 

1. The power to borrow money as a means of raising a 
fund to make future local improvements or to carry on the 
ordinary operations of the municipality cannot be implied 
from the mere authority to make such improvements or from 
the general grants of municipal power. These usually con- 
template that the expense of the execution of the ordinary 
municipal powers shall be met by the revenues derived each 
year from taxation. (It should be kept constantly in mind 
that annual taxation is the normal means of raising funds, and 
borrowing is abnormal. — Author.) 

2. It does not follow, because ^banking, trading, and 
other private corporations organized for pecuniary profit are 
held in this country to possess the incidental power to borrow 
money and to issue commercial paper having all the qualities 
attributed to such paper by the Law Merchant, that a like 
power is inherently possessed by public and municipal cor- 
porations. The analogy is false and delusive. * * * The 
nature of the usual duties devolved by law upon municipalities 
does not make it necessary to imply the existence of a general 
power to borrow money and to issue commercial paper. 

3. The power to issue commercial paper which is unim- 
peachable in the hands of the holder, is not among the ordi- 
nary incidental powers of a public or municipal corporation. 
It must be conferred expressly, or by fair implication, as a 
necessary, or at least a reasonable and usual, means of execut- 
ing the particular power to which it is claimed to be inci- 
dental. * * * Any fair or substantial doubt on this point 
is fatal to the existence of such power. 

4. Express power to borrow money, in some States 

2 Dillon, p. 532. 

3 Dillon, p. 539. 



44 MUNICIPAL BONDS 

* * * will be taken, if there be nothing in the legislation 
to negative the inference, to include the power, * * * to 
issue negotiable paper with all the incidents of negotiability. 
But under * * * a constantly increasing weight of authority 

* * * an express power to borrow does not necessarily 
authorize the issuance of negotiable paper, the power to give 
to evidences of municipal indebtedness and municipal obliga- 
tions the characteristics of negotiability being a power which 
must be conferred upon the municipality either in express 
words or their equivalent by necessary implication. 

5. Although a municipal corporation * * * may * * * 
create debts, and may, when not restrained by statute, evi- 
dence the liabilities thus incurred, yet if the instrument is 
made to assume the form of negotiable paper, such paper is 
always open to defenses in the hands of the transferees when 
it is issued without express authority from the legislature, or 
authority clearly to be implied from the charter or legislation 
applicable to the municipality. 

Stated in other words, Judge Dillon regards it as the true 
doctrine that, "merely as incidental to the discharge of its 
ordinary corporate functions, no municipal or public corpora- 
tion has the right to invest any instrument it may issue, what- 
ever its form, with that supreme and dangerous attribute of 
commercial paper which insulates the holder for value from 
defenses and equities which attach to its inception." 4 

Limitations on incurring indebtedness. — A limitation 
placed by law on municipal debt creation is generally assumed 
to be a protection to bondholders. The limit is usually a per- 
centage of the assessed valuation of taxable real property. If 
it is too low it may hamper the city in obtaining needed capi- 
tal for improvements. 

The object of a limitation on indebtedness is obviously to 
prevent the increase of the burden of taxation or to keep 
taxation within limits which may be easily borne. It is gener- 
ally based on real property valuations because these are more 
stable than taxes on personal property. Like all statutory 
limitations, the power is frequently evaded and many devices 
have been employed to evade the restrictions placed about the 
power to contract debts. Notable among these is the plan to 
provide municipal water works by purchasing a plant privately 
built, subject to the water bonds outstanding which, as they 

4 Dillon, pp. 539-543. 



MUNICIPAL BORROWING 45 

are not a direct municipal obligation, are not a part of the 
municipal debt. 5 As, however, the water bonds must be re- 
deemed from the proceeds of taxation, direct or indirect, it 
seems that this evasion would not be successful. In general, 
it may be said that constitutional or statutory provisions in 
regard to the creation of local debt which are too strict or 
too narrow are undesirable and likely to lead to a long list of 
exceptions and special acts which, in the end, will take much 
of the effectiveness out of the limitations. 6 

Constitutional debt limits. — A constitutional debt limita- 
tion, while a protection to the bondholder, is a serious thing 
because bonds issued in violation of the limit are invalid. The 
bondholder may obtain relief from the disastrous effects of a 
statutory debt limit by an appeal to the legisature but there is 
no such appeal from the effect of a constitutional limitation. 

"As long as the municipality has a sufficient margin 
within which it may incur debt for its ordinary purposes, no 
difficulty is met with in complying with the simplest and most 
absolute limitation; but the moment that the constitutional 
debt limit is reached or so closely approached that a city no 
longer has the credit which will enable it to finance its affairs, 
it is apparent that difficulties immediately arise. The city 
must continue to manage its affairs in some way. It must 
meet current expenses, and it may be that the health and well- 
being of the citizens imperatively require the expenditure of 
large amounts. The municipal officers try to overcome these 
difficulties as best they can, and out of their action litigation 
frequently follows. The nature of the difficulties which have 
arisen is reflected in the elaborate constitutional provisions 
which have been adopted in later years. Each qualification, 
restriction, or additional safeguard thus inserted has been 
adopted for the purpose of overcoming some difficulty or cor- 
recting some abuse which was found to exist under the simpler 
form of constitutional limitations, and each of these qualifica- 
tions, restrictions, and additional safeguards practically repre- 
sents some matter with which the courts have been obliged 
to deal." 7 

Excepted purposes. — Many State constitutions make pro- 
vision for water and sewerage "by declaring that the debt 

"Chamberlain, p. 224. 
"Raymond, p. 152. 
'Dillon, p. 341, 



46 MUNICIPAL BONDS 

incurred for water supply or for sewers shall not be subject 
to the limitation, or by declaring that the debt limit may be 
increased for the purpose of purchasing or constructing water 
works or sewers; in some instances, lighting plants are placed 
upon a similar footing." 8 The reason for such exceptions is 
obvious. A pure and wholesome supply of water and the dis- 
posal of refuse matter are both imperative necessities in large 
communities. Indeed, there is another reason for the exemp- 
tion of water debt, for where the water system operates by 
gravity and not by pumping, the revenues should be sufficient 
to maintain the plant and provide the necessary funds for 
debt service. Lighting plants are in many jurisdictions re- 
garded, at least in theory, as self-sustaining public utilities. 
By "self-sustaining" is meant that the revenue or income from 
the utility is sufficient to pay operating charges and interest 
and principal of the debt incurred in its acquisition. 

Illustrations. — To illustrate these statements, the consti- 
tutional and statutory limitations applying to New York State 
municipalities on incurring debt may be considered. Similar 
provisions are found in the constitutions and laws of many 
States. 

"No county, city, town or village shall * * * be allowed 
to incur any indebtedness except for county, city, town or 
village purposes * * *. No county or city shall be allowed 
to become indebted for any purpose or in any manner to an 
amount which, including existing indebtedness, shall exceed 
ten per centum of the assessed valuation of the real estate of 
such county or city subject to taxation, as it appeared by the 
assessment rolls of said county or city on the last assessment 
for State or county taxes prior to the incurring of such indebt- 
edness; and all indebtedness in excess of such limitation, 
except such as may now exist, shall be absolutely void, except 
as herein otherwise provided. No county or city whose pres- 
ent indebtedness exceeds ten per centum of the assessed valua- 
tion of its real estate subject to taxation shall be allowed to 
become indebted in any further amount until such indebted- 
ness shall be reduced within such limit." 9 

Exceptions. — Exceptions in regard to indebtedness in- 
curred in anticipation of the collection of taxes and applying 

8 Dillon, p. 339. 

8 Constitution, Art. VIII, Sec. 10, as last amended November 6, 1917, in 
effect January 1, 1918. 



MUNICIPAL BORROWING 47 

to the City of New York follow, and the section further 
provides : 

"Nor shall this section be construed to prevent the issue 
of bonds to provide for the supply of water; but the term of 
the bonds issued to provide the supply of water, in excess of 
the limitation of indebtedness fixed herein, shall not exceed 
twenty years, and a sinking fund shall be created on the issu- 
ing of the said bonds for their redemption, by raising annually 
a sum which will produce an amount equal to the principal 
and interest of said bonds at their maturity. All certificates 
of indebtedness or revenue bonds issued in anticipation of the 
collection of taxes which are not retired within five years after 
their date of issue, and bonds issued to provide for the supply 
of water, and any debt hereafter incurred by any portion or 
part of a city, if there shall be any such debt, shall be included 
in ascertaining the power of the city to become otherwise 
indebted; except that * * * debts incurred by any city of the 
second class after the first day of January, nineteen hundred 
and eight, and debts incurred by any city of the third class 
after the first day of January, nineteen hundred and ten, to 
provide for the supply of water, shall not be so included." 

Note that the constitutional limitations apply only to 
counties and cities, not to villages, towns or school districts. 
The limitations applying to the City of New York are omitted 
as being special in their application and not of general 
interest. 

While these provisions are self-executing (that is, legisla- 
tion is not necessary to make them workable), the same 
article and section of the constitution directs the legislature 
to "prescribe the method by which and the terms and condi- 
tions under which the amount of any debt to be so excluded 
shall be determined, and no such debt shall be excluded except 
in accordance with the determination so prescribed." 

In the New York General Municipal Law, which applies 
to counties, towns, cities and villages, we find: 

"No county containing a city of more than one hundred 
thousand inhabitants, nor any such city shall contract any 
debt, the amount of which, exclusive of its outstanding debt, 
shall exceed a sum equal to five per centum of the aggregate 
valuation of the real property within its bounds, as assessed 
for State and county purposes upon the then last corrected 
assessment-roll, nor shall it contract any such debt if the 



48 MUNICIPAL BONDS 

amount thereof inclusive of its outstanding debts shall excee 1 
a sum equal to ten per centum of such valuation. This sec- 
tion shall not be construed to prevent the issuing of certifi- 
cates of indebtedness or revenue bonds issued in anticipation 
of the collection of taxes of amounts actually contained or to 
be contained in the taxes for the year when such certificates 
or revenue bonds are issued and payable out of such taxes. 
Nor shall this section be construed to prevent the issuing of 
bonds to provide for the supply of water, but the term of the 
bonds issued to provide for the supply of water shall not 
exceed twenty years, and the sinking fund shall be created 
on the issuing of said bonds for their redemption by raising 
annually a sum which will produce an amount equal to the 
amount of the principal of said sum and interest of said bonds 
at their maturity. This section shall not apply to debts con- 
tracted for the purpose of retiring or paying any existing 
indebtedness pursuant to the provisions of this chapter." 10 

The Village Law provides that: 

"A village shall not incur indebtedness if thereby its total 
contract indebtedness, exclusive of liabilities for which taxes 
have already been levied and obligations issued to provide for 
the supply of water, shall exceed ten per centum of the 
assessed valuation of the real property of such village, sub- 
ject to taxation, as it appeared on the last preceding village 
assessment-roll." u 

Typical debt statements of second and third class cities 
in New York follow this chapter. They should be read in 
connection with the foregoing extracts from the constitution 
and statutes. 

Debt limit contained in Pierson Act. — In the State of 
New Jersey there is no constitutional debt limit and the statu- 
tory limitation is, so far as is germane to our inquiry, con- 
tained in the Pierson Act. 12 

When Mr. Pierson and his collaborators began their work 
of drafting a uniform statute to govern the issue of munici- 
pal obligations, it was found necessary to limit in some way 
the indebtedness which might be incurred. The power of 
counties to incur debt is limited to four per cent of the average 
assessed valuation of the taxable real estate for the preceding 

10 Cons. Laws, Chap. 24, Sec. 3. 

11 Cons. Laws, Chap. 64, Sec. 130. 
"P. L., 1917, p. 803. 



MUNICIPAL BORROWING 49 

three years. Municipal indebtedness other than that of 
counties is limited to seven per cent, although in certain cases 
additional indebtedness not to exceed two per cent may be 
incurred. The method of arriving at these percentages is 
highly artificial. It may have been, for example, that certain 
municipalities were largely indebted for the construction of 
bulkheads intended to protect the water front from encroach- 
ments by the sea, and if this debt were counted against the 
borrowing power, very little margin would remain. Hence 
it is provided that such debt may be excluded in its entirety. 
In cities (or other municipalities operating under the "City" 
article of the School Law) indebtedness incurred for educa- 
tional purposes may be excluded, if it does not exceed three 
per cent of the average assessed valuation of the taxable real 
property for the preceding three years, or if it does, an 
amount equal to three per cent may be excluded. So, also, 
water bonds may be excluded in their entirety. 

Typical annual and supplemental debt statements of a 
large New Jersey city filed pursuant to the statute follow 
this chapter; after which is a summary statement of the in- 
debtedness of the same city at substantially the same time. 
The latter statement shows the true debt. The two former 
show the highly artificial deductions permitted by the statute. 
It is obvious that the net debt stated in this manner may be 
very far from reflecting the real condition of the 
municipality. 

In conclusion it may be said that indebtedness of ten per 
cent is dangerously high. 

The power to issue negotiable instruments. — As we have 
seen, the weight of authority is that municipal corporations 
have no implied power to issue negotiable instruments but 
such a power must be looked for in the charter or some other 
act of the legislature; "the legislative act, being the only 
source of the authority, measures and limits the power it con- 
fers." 13 If the statute gives no power to issue the bond, the 
municipality is not bound. 14 U A. municipality can only act 
under and in accordance with the statutory authority which 
is conferred upon it. If the power is limited, it cannot exceed 
the prescribed limit, and its power is exhausted when the 
limit is reached. If it requires further powers, it must obtain 

13 Dillon, p. 1354. 

14 U. S. v. Macon (1878), 99 U. S. 582. 



50 MUNICIPAL BONDS 

these by a further grant from the legislature. In granting 
such authority the power of the legislature is supreme, except 
in so far as it is limited and controlled by constitutional pro- 
visions." 15 The rule is that whenever the power to issue 
bonds is called in question, the authority to issue must be 
clearly shown and will not be inferred from uncertain data 
and can only be conferred by language which leaves no reason- 
able doubt of intent to confer it. 16 

This canon is so well recognized that express power, ordi- 
narily sufficient to the needs of the municipal or quasi-munici- 
pal corporation, is usually found in charters or general stat- 
utes applicable to the municipality. 

Power to issue bonds. — The power to issue negotiable 
long-time bonds is one which experience has shown to be espe- 
cially liable to serious abuse. The proneness of municipali- 
ties to incur indebtedness, especially if its burden can be 
thrown upon posterity, is well known and needs, in the in- 
terest of the public welfare, to be regulated and restricted. 
Power to create debts payable in the future is necessary in 
order to enable municipalities to make expensive and perma- 
nent local improvements such as building sewers, paving 
streets, erecting necessary public buildings, procuring public 
parks, constructing or acquiring water works, lighting plants, 
and other public utilities if desired. The burden of such 
large expenditures should not be paid immediately but spread 
over a reasonable period of time. 17 

Illustrations of statutes granting bond-issuing power. — 
For illustrative statutes granting power to issue bonds, we 
may again turn to New York and New Jersey. 

The statutory authority for the issue of bonds in New 
York is found in several general statutes and in many 
special ones. We need consider only the following: 

The County Law. — The County Law provides that boards 
of supervisors may: 

"Borrow money when they deem it necessary for the erec- 
tion or alteration of county buildings and for the purchase 
of sites therefor, on the credit of the county, and for the 
funding of any debt of the county not represented by bonds, 
and issue county obligations therefor, and for other lawful 

"Dillon, p. 1358. 
"Dillon, p. 1359. 
17 Dillon, p. 336. 



MUNICIPAL BORROWING 51 

county uses and purposes; and authorize a town in their 
county to borrow money for town uses and purposes on its 
credit, and issue its obligations therefor, when, and in the 
manner, authorized by law." 18 

The General Municipal Law. — As pointed out above, the 
General Municipal Law applies to counties, towns, cities and 
villages. It also provides that: 

"A funded debt shall not be contracted by a municipal 
corporation, except for a specific object, expressly stated in 
the ordinance or resolution proposing it; nor unless such ordi- 
nance or resolution shall be passed by a two-thirds vote of 
all the members elected to the board or council adopting it, 
or submitted to and approved by the electors of the town or 
county, or taxpayers of the village or city when required by 
law. * * * Such ordinance or resolution shall provide for 
raising annually, by tax, a sum sufficient to pay the interest 
and the principal, as the same shall become due." 19 

This statute also contains adequte provisions for the levy 
of a tax for debt service, 20 for refunding, 21 and registra- 
tion, 22 and will repay study. 

The General City Law contains a general grant of power 
for all cities: 

"To become indebted for any public or municipal purpose 
and to issue therefor the obligations of the city, to determine 
upon the form and the terms and conditions thereof, and to 
pledge the faith and credit of the city for payment of prin- 
cipal and interest thereof, or to make the same payable out 
of a charge or lien upon specific properties or revenues; 
* * * To establish and maintain sinking funds for the liqui- 
dation of principal and interest of any indebtedness, and to 
provide for the refunding of any indebtedness other than cer- 
tificates of indebtedness or revenue bonds issued in anticipa- 
tion of the collection of taxes for amounts actually contained 
or to be contained in the taxes for the year when such cer- 
tificates or revenue bonds are issued or in the taxes for the 
year next succeeding, and payable out of such taxes." 23 

This statute also provides that before bonds may be 

18 Cons. Laws, Chap. 11. 

19 Id., Chap. 24, Sec. 6. 

20 Id., Sec. 7. 

21 Id., Sec. 8. 

22 Id., Sees. 10, 11. 

23 Id., Chap. 21, Sec. 20, sub. 5. 



52 MUNICIPAL BONDS 

issued, a statement of the financial condition of the city must 
be made by the comptroller and filed in the office of the city 
clerk. Under well-established principles every purchaser of 
bonds is charged with notice of the contents of this certificate 
and an examination of a properly prepared certificate should 
show whether or not the city is within its debt limit. See the 
debt statement of a New York third class city, which follows 
this chapter. The provisions of the Second Class Cities 
Law 24 in regard to temporary and funded debts are very 
liberal and permit the creation of a funded debt "for any 
municipal purpose." This statute also contains various limi- 
tations upon the grant of power, as to maturities, execution, 
sale, and medium of payment, and the following interesting 
estoppel provision: 

"An ordinance creating a funded debt may provide that 
the bonds therein authorized shall contain a recital that they 
are issued pursuant to law and an ordinance of the common 
council, as provided by section sixty of the Second Class 
Cities Law. Such recital, when so authorized, as aforesaid, 
shall be conclusive evidence of the regularity of the issue of 
said bonds and of their validity." 25 

The Pierson Act of New Jersey. — In New Jersey, the 
power to incur debt and issue negotiable instruments for 
municipal capital expenditures is found in the Pierson Act, 26 
so frequently referred to. This act provides that any county 
or municipality shall have power to "borrow money and issue 
its negotiable bonds to pay for any improvement or property 
which it is or may be authorized or required by law to make 
or acquire, or for any other purpose which it is authorized or 
required by law to undertake or for which it is authorized or 
required by law to make an appropriation or to refund bonds 
* * * or for two or more such purposes." The machinery 
of issuing bonds under this statute is extremely interesting 
and will well repay examination in detail. Briefly, the term 
of the bonds depends upon the life of the improvements, as 
defined in the act. Valuable estoppel provisions and an ex- 
tremely interesting scheme of public sale which will be 
examined later in more detail are also to be found. 

84 Cons. Laws, Chap. 53, Sees. 60, 61. 

28 Id., Sec. 60. 

26 P. L. 1917, p. 803. 



MUNICIPAL BORROWING 53 

The Municipal Finance Act of North Carolina. — Prob- 
ably one of the best illustrations of statutes authorizing the 
issue of bonds, limiting the power to issue them and prescrib- 
ing the method of issue, is the Municipal Finance Act of 
North Carolina. It is so important that it is given in its 
entirety as an appendix to this volume, and will well repay 
careful study. 

Refunding. — The power to refund valid and subsisting 
debt must ordinarily be expressly granted for the reason that 
the exercise of the power inevitably results in the issue of 
negotiable securities. Refunding does not increase the mu- 
nicipal debt. It merely changes the evidence of the debt and 
the time of its payment. If valid bonds have been issued 
and the municipality has exceeded its debt limit, maturing 
bonds may nevertheless be refunded (pursuant to proper 
statutory authority) in spite of the excess of indebtedness, for 
the reason that the refunding operation, as stated, does not 
increase the debt. 

Legislative ratification. — In conclusion it may be noted 
that where municipal bonds are issued without proper 
authority, the legislature may legalize the unauthorized acts, 
provided it might have conferred authority before the unau- 
thorized acts were committed, 27 but corporate ratification 
without legislative authority cannot make a municipal bond 
valid which was void when issued. 28 

Short term loans. — These are made in anticipation of the 
collection of taxes and to finance temporarily the construction 
cost of improvements. By temporary financing, the cost of 
an improvement may be determined in advance of a perma- 
nent bond issue, and an overissue avoided. For loans of this 
class, the economic basis is different from that for long term 
bonds. Such loans are highly regarded by many investment 
bankers and by banking houses generally, because they are 
more or less liquid assets, paid from the current taxes in antici- 
pation of which the loans are made, or funded when perma- 
nent bonds are issued. Until recently, it was not the custom to 
require the opinion of counsel as to the legality of such loans 
but the practice is growing. 

2T Anderson v. Santa Anna (1885), 116 U. S. 356. 
28 Lewis v. City of Shreveport (1883), 108 U. S. 282. 



54 MUNICIPAL BONDS 

Debt Statement of a New York Second Class City 

Schedule No. I 

STATE OF NEW YORK 1 „„. 

COUNTY OF WESTCHESTER/ S °' 

I, JAMES W. HOWORTH, City Clerk of the City of Yonkers, do hereby 
certify that the assessed valuation of property subject to taxation located within 
the City of Yonkers in the year 1921, for the purpose of State, County and City, 
as shown by the assessment rolls for said year, is as follows: 

Real Estate $174,856,895.00 

Personal 348,550.00 

Special Franchise 3,266,142.00 

$178,471,587.00 



IN WITNESS WHEREOF, I have hereunto set my hand and affixed the 
seal of the City of Yonkers, this 15th day of January, 1921. 

J. W. HOWORTH, 

City Clerk. 

STATEMENT OF CONSTITUTIONAL DEBT-INCURRING CAPACITY 

OF THE CITY OF YONKERS, N. Y., AS OF FEBRUARY 10, 1921, 

INCLUDING $2,312,000.00 BONDS TO BE SOLD 

JANUARY 25th, 1921. 

Limit-' 

Ten per centum (10%) of Assessed Valuation of Real Estate (in- 
cluding Special Franchises) as filed with the City Clerk, Oc- 
tober 1, 1920, subject to taxation in 1921 (Schedule No. 1) .. .$17,812,303.70 
Net Debt: (Schedule No. 2) 12,490,749.20 

Margin of Debt-Incurring Capacity as of February 10th, 1921 $ 5,321,554.50 

Schedule No. 2 
DESIGNATION AND PURPOSE OF BONDS 

City Hall $ 275,800.00 

Local Improvement 2,308,533.33 

Deficiency 1,396,500.00 

Building 200,050.00 

Water 2,495,250.00 

Equipment 186,800.00 

Street Paving 109,280.00 

Park 144,000 00 

Street Repair 6,000.00 

Road Improvement 81,500.00 

School 3,852,810.00 

Hospital 113,750.00 

Assessment 1,511,000.00 

Tax Sale 355,000.00 

Grade Crossing Elimination 149,000.00 

Dock 154,000.00 

Total Bonds $13,339,273.33 



MUNICIPAL BORROWING SS 

NOTES: 

Local Improvement $ 1,409,000.00 

Bond Notes 1,238,000.00 

In anticipation of the collection of Taxes and 

Revenues 2,350,000.00 

Total Notes $ 4,997,000.00 

CONTRACT LIABILITY 861,476.08 

LAND LIABILITY 20,000.00 

Total Indebtedness $19,217,749.41 



DEDUCTIONS— TO ASCERTAIN MARGIN OF DEBT INCURRING 

CAPACITY 

Notes maturing within five (5) years from date of original issue, 

in anticipation of taxes now outstanding $ 1,828,851.60 

Sinking Fund for Water Bonds issued prior to January 1, 1908.. 80,408.92 

Water Bonds issued after January 1, 1908, to provide for the 
supply of water, less the amount thereof used to pay debts 
contracted for prior to January 1, 1908 1,435,250.00 

Proceeds of Bonds and Notes to pay liabilities included above 

(not including proceeds of Water Bonds) 2,391,033.01 

Outstanding Bonds maturing this year, provided for in annual 

estimate of 1921 (not including Bonds otherwise deducted) 991,456.67 

TOTAL DEDUCTIONS $ 6,727,000.20 

NET DEBT $12,490,749.20 

STATE OF NEW YORK 1 

COUNTY OF WESTCHESTER J 

I, JAMES J. LYNCH, Comptroller of the City of Yonkers, State of New 
York, do hereby certify that the statements hereto annexed, concerning the 
finances of said city, are true and correct as appears from the records of my 
office. 

IN WITNESS WHEREOF, I have hereunto set my hand this 15th day of 
January, 1921. 

JAMES J. LYNCH, 

Comptroller of the City of 

Yonkers, New York. 



Debt Statement of a New York Third Class City 

STATE OF NEW YORK ) 
COUNTY OF ALBANY ) bb: 

Pursuant to Section 23-a of the General City Law constituting chapter 21 
of the Consolidated Laws, I, the undersigned, Comptroller of the City of 
Cohoes, hereby certify: 

(1) The existing indebtedness of the City of Cohoes, on the date of this 
Certificate is One million two hundred eighty-five thousand one hundred forty- 
two dollars ($1,285,142.00). 



56 MUNICIPAL BONDS 

(2) The amount thereof consisting of bonds issued to provide for the 
supply of water issued prior to January 1, 1910, and also bonds issued there- 
after to refund bonds issued prior to such date, or the term of which is more 
than twenty years in Two hundred forty-three thousand Dollars ($243,000). 

(3) The amount thereof consisting of bonds issued to provide for the 
supply of water issued after January 1, 1910, except the refunding bonds 
specified in paragraph 2, the term of which is not more than twenty years is 
Seventy-three thousand Dollars ($73,000). 

(4) The amount of sinking fund for the redemption of outstanding bonded 
indebtedness is (a) for the redemption of water bonds, nothing; and (b) for 
the redemption of other bonds, Six thousand six hundred seventy-four and 
67/100 Dollars ($6,674.67). 

(5) The amount of certificates of indebtedness or revenue bonds issued in 
anticipation of the collection of taxes outstanding (a) more than five years is 
nothing, and (b) less than five years is nothing. 

(6) The amount of such certificates of indebtedness or revenue bonds 
which has not been paid out of taxes for the year when such certificates or 
revenue bonds were issued, or for the year next ensuing is nothing. 

(7) The amount of the assessed valuation of the real estate of the City of 
Cohoes, subject to taxes shown by the assessment rolls of said City on the last 
previous assessment for State or County taxes is Twelve million sixty-three 
thousand two hundred sixty-seven Dollars ($12,063,267). 

(8) A description of the property or improvement for the acquisition or 
making of which the debt is to be created and the probable life or such proper- 
ties or improvements is (Omitted). 

IN WITNESS WHEREOF I have hereunto set my hand at the City of 
Cohoes, New York, this 15th day of October, 1921. 

City Comptroller. 

Annual Debt Statement of a New Jersey City 

STATE OF NEW JERSEY \_ 
COUNTY OF HUDSON j 

James F. Gannon, Jr., being duly sworn deposes and says: Deponent is the 
Director of Revenue and Finance hereinafter called "the municipality" and the 
chief financial officer thereof. The Annual Debt Statement annexed hereto and 
hereby made a part hereof is a true statement of the debt condition of the 
municipality as of December 31, 1920. The amounts of such items as are indefi- 
nite or unascertainable are estimated. 

JAMES F. GANNON, JR. 
Subscribed and sworn to before me 
this first day of January, 1921. 

RICHARD ROE, 

Notary Public of New Jersey. 

A. GROSS INDEBTEDNESS 

The gross indebtedness of the municipality, inclusive of notes or bonds 
authorized but not issued and obligations of the municipality held uncanceled in 
any sinking fund, exclusive of indebtedness incurred for current expenses of the 
current fiscal year and inclusive of notes and bonds and certificates of the 
municipality issued for school purposes other than for the current expenses of 



MUNICIPAL BORROWING 57 

schools, but not including the indebtedness of any school district constituting a 
separate corporation, is as follows: 

(a) Bonded Debt. (Including bonds authorized but not issued.) 

1. Bonds payable or to be payable in whole or in part out of 

special assessments on property specially benefited $ 3,179,004.95 

2. Bonds issued, and authorized but not issued, for the fol- 
lowing purposes so far as separately authorized or issued 
for such purposes: 

Docks 251,000.00 

Water supply 14,650,254.72 

Electric light or power None 

Gas None 

Markets None 

3. Bonds issued, and authorized but not issued, for other 

purposes from the carrying out of which the munici- 
pality derives revenue from rental or service. (State 

purposes separately.) None 

None 

4. Bonds issued, and authorized but not issued, for school 

purposes, after deducting sinking funds and funds in 

hand applicable thereto 4,983,827.10 

5. Bonds issued, and authorized but not issued, for park 

purposes. (Note. — In the case of a county, deduct 
sinking funds and funds in hand applicable to such 
bonds) None 

6. Bonds issued, and authorized but not issued, not included 

above. (State purposes separately) 7,000,250.00 

None 
None 

(b) Evidences of indebtedness other than bonds. (Including 

temporary notes or bonds, issued under section thir- 
teen of Chapter 252, P. L. iqi6, as amended. Note. — 
Not including notes issued or to be issued in anticipa- 
tion of taxes of the current fiscal year.) 

1. Evidences of indebtedness issued, and authorized but not 

issued, for school purposes 2,874,400.00 

2. Other evidences of indebtedness issued, and authorized 

but not issued 7,632,946.06 

TOTAL GROSS INDEBTEDNESS $40,571,682.83 



B. DEDUCTIONS 

The deductions are as follows: 

(a) The amount of special assessments levied and uncollected, 

applicable to the payment of any part of the gross 
indebtedness not deducted under some other item 
hereof $ 603,759.83 

(b) The amount as estimated by resolution of the governing 

body of special assessments to be levied, which will 
be applicable to any part of the gross indebtedness 
not deducted under some other item hereof Nothing 

(c) Indebtedness incurred, and authorized but not incurred, 

for the purposes below stated (but not for the sup- 



58 MUNICIPAL BONDS 

port or maintenance thereof) separately stated in so 
far as separately issued for such purposes, the pay- 
ment of the principal and interest of which indebted- 
ness was adequately provided for from revenue from 
rentals or services rendered after deducting operat- 
ing expenses during the previous fiscal year, namely: 

1. Docks None 

2. Electric light or power None 

3. Gas None 

4. Markets None 

3% of the average assessed valuation as 

stated in subdivision D hereof $9,140,986.53 

Deductions under this item (c) (Insert 

smaller of above two amounts) None 

(d) Indebtedness incurred and authorized but 

not incurred, for the supply of water.. 14,650,254.72 

(e) The net indebtedness incurred and author- 

ized but not incurred, for school pur- 
poses as stated in A (a) 4, and 
A (b) 1 7,858,227.10 

3% of the average assessed valuation as 

stated in subdivision D hereof 9,140,986.53 

Deductions under this item (e) (Insert 

smaller of above two amounts) 7,858,227.10 

(f) Funds in hand and sinking funds or such parts thereof 

as are held for the payment of any part of the gross 
indebtedness other than that which is included in these 
deductions or otherwise deducted. Under this item is 
included the proceeds on hand of any bonds or notes 
held to pay any part of the gross indebtedness and 
the estimated proceeds of bonds or notes which have 
been authorized if such estimated proceeds will be 
held for that purpose 5,165,320.64 

(g) Amount included in the current taxes levied for the 

payment of any part of the gross indebtedness other 

than that which is included in these deductions None 

(h) Amount of unpaid taxes not more than three years in 

arrears 1,189,195.27 

(i) Indebtedness incurred, and authorized but not incurred, 
for the construction or reconstruction of dikes, bulk- 
heads, jetties, or other devices erected along the ocean 
or inlet fronts and intended to prevent the encroach- 
ment of the sea including the improvements to restore 
property damaged by the sea None 

(j) Amounts owing by the State, by other municipalities or 
by other persons or corporations on account of that 
part of an improvement (not an assessment improve- 
ment) for which indebtedness has been incurred or 
authorized and not deducted under some other item None 



TOTAL DEDUCTIONS $29,466,757.56 



MUNICIPAL BORROWING 59 

C. THE NET DEBT 

The net debt of the municipality as determined by deducting the deduc- 
tions as stated in subdivision B from the gross debt stated in subdivision A is 
as follows: 

Gross debt $40,571,682.83 

Deductions 29,466,757.56 

NET DEBT $11,104,925.27 

D. AVERAGE ASSESSED VALUATION 

The three next preceding assessed valuations of the taxable real property 
(including improvements) of the municipality and the average thereof is as 
follows: 

1918 assessed valuation of such real property $300,550,016 

1919 " " " " " 301,689,039 

1920 " " " " " 311,859,599 

AVERAGE OF SUCH ASSESSED VALUATIONS. . .$304,699,551 

E. PERCENTAGE OF NET DEBT TO AVERAGE ASSESSED 
VALUATION 

The percentage that the net debt as computed under subdivision C hereof 
bears to the average of the assessed valuations computed under subdivision D 
hereof is as follows: 

Three and 64/100 per cent (3 64/100%) 

Supplemental Debt Statement of a New Jersey City 

I 



STATE OF NEW JERSEY ) „<,. 
COUNTY OF HUDSON 



JAMES F. GANNON, Jr., being duly sworn deposes and says: 
Deponent is the Director of the Department of Revenue and Finance of 
the City of Jersey City hereinafter called "the municipality" and the chief 
financial officer thereof. The supplemental Debt Statement annexed hereto 
and hereby made a part hereof is a true statement of the debt condition of the 
municipality on the date hereof and is computed as provided for the annual 
debt statement by Chapter 252 P. L. 1916, as amended. 

Subscribed and sworn to before me ) JAMES p GANN0N jr. 

this 25th day of July, 1921. ) 

ROBERT ORR 

Commissioner of Deeds 

for New Jersey. 

A. (1) The net debt of the municipality as 
stated in subdivision C of the annual 
debt statement last filed is $ 11,104,925.27 

(2) The amount by which such net debt has 

been \ increased ) is 737,111.96 

/ decreased ) 

(3) The net debt at the time of this state- 
ment is $ 11,842,037.23 



60 MUNICIPAL BONDS 

B. The amounts and purposes separately item- 

ized of the bonds or notes about to be 

authorized, together with the deductions 

which may be made on account of each 

such item: 

General Improvement Bonds $ 2,275,000.00 

Proceeds thereof to be applied to existing 

indebtedness ' 2,266,000.00 

TOTAL under this Item B 9,000.00 

C. The net debt of the municipality after the 

indebtedness to be authorized has been 

incurred is (NOTE— Add A and B) ... . 11,851,037.23 

D. The three next preceding assessed valua- 

tions of the taxable real property (in- 
cluding improvements) of the munici- 
pality and the average thereof is as 
follows: 

1918 assessed valuation $300,550,016.00 

1919 " " 301,689,039.00 

1920 " " 311,797,199.00 

Average of assessed valuations $304,678,751.00 

E. The percentage that the net debt as com- 

puted under subdivision C hereof bears 
to the average assessed valuation com- 
puted under subdivision D hereof is as 
follows: 
Three and 89/100 per cent (3.89%). 

Summary Debt Statement of the Same New Jersey City 

CITY OF JERSEY CITY, N. J. 
FINANCIAL STATEMENT 

Total outstanding bonds $ 31,009,510 

Water Bonds $14,650,255 

Sinking funds and bond cash account other than for 

Water Bonds 6,002,185 20,652,440 



NET BONDED DEBT $ 10,357,070 

Floating and temporary indebtedness (including Temporary Bonds 

issued, and authorized, but unissued) 10,487,345 



TOTAL NET DEBT $ 20,844,415 

Less amount of floating or temporary indebtedness to be funded by 

bonds to be issued 864,000 



$ 19,980,415 
BONDS TO BE ISSUED 864,000 



NET DEBT, INCLUDING BONDS TO BE ISSUED $ 20,844,415 

ASSESSED VALUATIONS 

Real Property, including Improvements $319,075,528 

Personal Property 50,772,250 

TOTAL ..$369,847,778 



Chapter VII 
THE PROMISSOR IN THE BOND 

Bonds classified. — Most writers on municipal bonds sep- 
arately classify bonds issued by the United States, the various 
States of the Union, counties and municipalities, the latter 
including quasi municipalities and taxing districts. 

There is good reason for separate treatment of bonds 
issued by the Federal Government and the States, both of 
which have a peculiarity hereinafter referred to. There 
seems to be no adequate reason for treating bonds issued by 
counties differently from those issued by municipalities and 
quasi municipalities. Neither is there any adequate reason 
for treating together municipal and quasi municipal obliga- 
tions. There is, indeed, better reason for a separate con- 
sideration of bonds issued by or supported by taxation of the 
latter class. 

It will be remembered that legislatures, within certain 
limitations not here relevant, may endow counties and lesser 
political subdivisions with such powers as they will. The 
power to issue negotiable instruments being statutory, legis- 
latures need not, and in fact do not, differentiate between 
counties and municipalities in this respect. There is techni- 
cally no difference between the borrowing powers of cities 
and counties, except such as are created by the constitutions 
of the States. The same general principles governing fiscal 
legislation apply to counties and municipalities. The logical 
classification is first as to the promissor; second, as to the 
character of the promise. 

Compulsory payment. — It has been well suggested that a 
proper classification is that based on means of payment, that 
is, whether payment is compulsory or not compulsory. This 
classification would distinguish, because of accepted prin- 
ciples, between bonds of a sovereign power (within which 
would be included the Federal and State Governments) and 
bonds of municipalities. There is, in strict legal contempla- 

61 



62 MUNICIPAL BONDS 

tion, no obligation upon the first class to pay its debts. The 
fulfillment of the promise of a government rests on good 
faith. When a municipality promises to pay, on the other 
hand, its promise may ordinarily be enforced. Certainly, it 
is within the power of a bondholder to sue the municipality 
and the courts will aid him to the full extent of their ability 
to enforce any judgment he may obtain. 

Federal and State bonds. — Bonds of the Federal govern- 
ment and those of the various States are outside the scope 
of this book. Such bonds depend upon the good faith of the 
sovereign because the sovereign cannot be sued without its 
consent, although some States, such as New York, give their 
consent in advance. In New York State, any person may sue 
the State in the Court of Claims which is provided for the 
purpose, but there is no means of enforcing the judgment of 
the Court of Claims unless the legislature makes an appro- 
priation. 

Before dismissing the subject of State bonds as not strictly 
within our province, it may be said that although States do 
contract debt it may not be sound economic policy for them 
to do so except in aid of public enterprises requiring enormous 
sums of money. The building of the Erie Canal in New 
York State was in its day a colossal undertaking and the 
money was properly borrowed. The relatively recent enlarge- 
ment of the Barge Canal was another such undertaking. 
Neither of these projects could have been paid for out of 
funds raised by taxation in one year, but appropriations for 
the building of State institutions, such as hospitals, should be, 
and in eastern States generally are, included in the annual 
budget appropriations. 

County bonds. — Counties are at most but legal organiza- 
tions which, for the purpose of safe administration, are vested 
with a few functions characteristic of a corporate existence. 
They are legal subdivisions of the State "created by the 
sovereign power of the State, of its own sovereign will, with- 
out the particular solicitation, consent or concurrent action of 
the people who inhabit them." * * * "With scarcely an 
exception, all the powers and functions of the county organ- 
ization have a direct and exclusive reference to the general 
policy of the State and are, in fact, but a branch of the general 
administration of that policy." x County bonds are usually 

1 Hamilton Co. v. Mighels (1857), 7 Ohio St. 109. 



THE PROMISSOR IN THE BOND 63 

issued for the construction of roads and bridges, court houses, 
jails and poorhouses. 

There is no legal principal peculiarly applicable to the 
issue of county bonds. The questions for consideration are 
economic; that is, the real questions are those of taxing power 
and debt. In considering the latter we must remember that 
the same property which is taxed by the county for county 
purposes is taxed by municipalities for their own purposes 
and may be again taxed and yet again taxed by various minor 
subdivisions, but this is also frequently true of cities. 

Contingent debt. — An item which is almost never consid- 
ered is contingent debt, which may become real in case of 
default of a minor subdivision of the county. For example, 
in Virginia, bonds for road improvements may be issued by 
the county, payable from taxes levied in specified "magis- 
terial" districts. The taxable property in such districts is 
primarily liable but the bonds are those of the county and 
the statutes provide that the county shall be liable in case of 
default. How its liability may be enforced is a different prob- 
lem under the statutes authorizing such bonds. Under the 
decisions it is real liability, contingent, it is true, but liable to 
become actual. 2 

True municipalities. — As our inquiry is largely directed 
toward ascertaining the powers of true municipalities to issue 
negotiable instruments, we may dismiss the obligations of 
such at this point with the understanding that according to 
the weight of authority a municipal corporation having ordi- 
narily full powers may have implied power to borrow for 
municipal purposes but it must have express statutory power 
to issue negotiable securities. 

Quasi municipalities. — "Civil corporations are of different 
grades or classes. * * * The school district or road district 
is usually invested by general enactments operating through- 
out the State with a corporate character, the better to per- 
form within and for the locality its special function, which 
is indicated by its name. It is but an instrumentality of the 
State and the State incorporates it that it may the more effec- 
tually discharge its appointed duty. * * * Considered with 
respect to the limited number of their corporate powers, the 
bodies above named," that is, quasi municipal corporations, 
"rank low down in the scale or grade of corporate existence; 
3 Moss v. Tazewell County (Va. 1911), 112, Va. 878; 72 S. E. 945. 



64 MUNICIPAL BONDS 

and hence have frequently been called quasi corporations. 
This designation distinguishes them on the one hand from 
private corporations aggregate, and on the other from mu- 
nicipal corporations proper, such as cities or towns acting 
under charters, or incorporating statutes, and which are in- 
vested with more powers and endowed with special functions 
relating to the particular or local interests of the municipality, 
and to this end are granted a larger measure of corporate 
life." 3 

Quasi corporations classified. — A classification of quasi 
municipal corporations, which is suggested by the actual facts, 
is as follows : 

(a) Those which may borrow and tax. 

(b) Those which may borrow but not tax. 

(c) Those which may be taxed but may not borrow. 
Those which may borrow and tax. — In the first class, that 

is those which may both borrow and tax, we can place school 
districts, the boards of education ordinarily being bodies cor- 
porate, which when a tax has been levied, as in New York, to 
be collected in installments, may issue bonds payable in the 
same years as the installments of tax are to be levied. Under 
this classification also fall irrigation, levee, and drainage dis- 
tricts. The Miami Conservancy District in Ohio, for example, 
has been incorporated for the purpose of enabling the people 
within the drainage area of the Miami River to issue bonds 
and protect themselves against floods and washouts. Another 
well-known example of a specially organized political sub- 
division is the Chicago Sanitary District. The district was 
incorporated to enable a section of the State to construct and 
finance drainage canals and other works for the protection 
of the public health. In connection with such securities it 
is well to bear in mind that the borrowing power must be 
accompanied by the taxing power. Otherwise the district 
would lack the means of obtaining revenues to meet the 
charges on its debt. No incorporated political district can 
assign its rights to tax or borrow to another organization, 
since it is a firm legal principle that a delegated power cannot 
be re-delegated. 4 

Those which may borrow but not tax. — There are prob- 
ably very few quasi corporations which may borrow but may 

3 Dillon, p. 67. 

4 Sakolski, p. 87. 



THE PROMISSOR IN THE BOND 65 

not tax. The Passaic Valley Sewer Commission in New 
Jersey is a quasi corporation of this character; its funds are 
derived from payments made to it by the various municipali- 
ties in the sewer district with which it has contracts, but in 
anticipation of the receipt of funds it may incur temporary 
debt. 5 The general scheme of financing the Passaic Valley 
improvement will well repay consideration by the student. 
Its peculiar characteristic (that it may not tax) is caused by 
a constitutional provision in New Jersey to the effect that a 
taxing district must be co-terminus with a political subdivision 
and that a political subdivision cannot be divided or sub- 
divided to form a tax district. 6 

Those which may be taxed but may not borrow. — Quasi 
municipal corporations which may be taxed but may not bor- 
row are of the type of which Virginia "magisterial" districts 
are examples. Bonds for road improvements in such districts 
are issued by the county. The funds to pay the bonds are de- 
rived from taxes levied upon property in the district. Hence 
we can say that such quasi corporations may be taxed but may 
not borrow. 7 

From the investor's viewpoint the distinction between 
bonds of counties, cities, quasi municipalities and taxing dis- 
tricts is most important. The particular features of the 
bonds of different promissors will be considered in subsequent 
chapters. 

5 P. L. 1907, p. 31, Sec. 7. 

6 Van Cleve v. Sewer Commissioners (N. J. 1903), 71 N. J. L. 574; 60 Atl. 
214. 

7 See Laws of Virginia, 1908, Chap. 70. 



Chapter VIII 
THE PROMISE AND THE PURPOSE OF THE BOND 

The greatest concern should be shown by the underwriter 
or investor as to the character of the promise made by the 
bond. No matter how limited or special the means of pay- 
ment, the municipal bond is on its face an unlimited and 
unqualified promise to pay. This is so except in the rare 
case of an honestly drawn assessment bond which may state 
on its face that the amount promised is payable only from a 
certain fund or taxes levied in a certain area, less than the 
territory included in the issuing unit. 

Debt limit. — The debt limit does not affect the character 
of the promise because the debt limit is or is not exceeded at 
the moment of issue. 

If an issue of bonds is within the debt limitation when 
issued, it remains so and if its life is extended by refunding, 
it does not lose this characteristic. 1 A municipality may issue 
bonds within its limit, become indebted in excess of it, and 
lawfully refund the bonds issued before the limit was reached, 
without increasing its debt, and the bonds issued to refund 
the old debt will be valid. This assumes proper statutory 
authority to refund. 

Whether a subsequent reduction of the debt operates to 
validate bonds issued in excess of the limitation of indebted- 
ness may depend upon constitutional or statutory provisions, 
the effect of the estoppel, if any, contained in the form of 
the bond, and upon the circumstances of the case. If the 
constitution or statute provides that indebtedness issued in 
excess of the limitation shall be absolutely void, then a reduc- 
tion of the debt so that the bonds in question fall within the 
permitted limitation, would not make the bonds valid. It is 
possible that they might be enforced but a discussion of the 
circumstances under which this would be possible will carry 
us too far into problems of law. The point to be observed 

1 Pou</hkeepsie v. Quintard (1892), 136 N. Y. 275. 



PROMISE AND PURPOSE OF BOND 67 

is that questions of limitation of indebtedness do not affect 
the character of the promise made by the bond. 

Limited taxation. — A limited tax rate results in a limited 
obligation. Where the power to tax to pay a bond is limited, 
the obligation, that is, the bond, is a limited obligation. This 
is well illustrated by the decision of the Supreme Court of 
the United States in United States v. County of Macon. 2 
The statute authorized railroad-aid bonds and provided for 
the levy of a tax to pay the same not exceeding one-twentieth 
of one per cent upon the assessed value of the taxable prop- 
erty of each year. Default having occurred, the bondholder 
recovered judgment upon interest coupons, execution was 
issued, and the judgment returned unsatisfied. The owner of 
the coupons asked for a writ of mandamus directing the 
county court to levy and collect a tax for the purpose of pay- 
ing the judgment. Mr. Chief Justice Waite said: 

"Every purchaser of a municipal bond is chargeable with 
notice of the statute under which the bond was issued. If the 
statute gives no power to make the bond, the municipality 
is not bound. So, too, if the municipality has no power, 
either by express grant or by implication, to raise money by 
taxation to pay the bond, the holder cannot require the mu- 
nicipal authorities to levy a tax for that purpose. If the 
purchaser in this case had examined the statutes under which 
the county was acting, he would have seen what might prove 
to be difficulties in the way of payment. As it is, he holds 
the obligation of a debtor who is unable to provide the means 
of payment. We have no power by mandamus to compel a 
municipal corporation to levy a tax which the law does not 
authorize. We cannot create new rights or confer new 
powers. All we can do is to bring existing powers into opera- 
tion. In this case it appears that the special tax of one- 
twentieth of one per cent has been regularly levied, collected, 
and applied, and no complaint is made as to the levy of the 
one-half of one per cent for general purposes. What is 
wanted is the levy beyond these amounts, and that, we think, 
under existing laws we have no power to order. . . . We 
have not been referred to any statute which gives a judgment 
creditor any right to a levy of taxes which he did not have 
before the judgment. The judgment has the effect of a 
judicial determination of the validity of his demand and of 
2 (1878), 99 U. S. 582. 



68 MUNICIPAL BONDS 

the amount that is due, but it gives him no new rights in 
respect to the means of payment." 

The reasoning of this opinion has been followed by the 
courts of last resort of several States. 

Constitutional limitations. — It should be noted that if the 
tax limitation is contained in the State constitution, the bond- 
holder may be in a very unpleasant predicament because there 
is no ready means of relief. It is a difficult matter to amend 
State constitutions and they are not ordinarily amended to 
relieve a creditor. If the limitation is by statute, an appeal 
may be made to the legislature, which in a proper case and 
in the absence of any constitutional prohibition may very 
properly give the bondholder relief by repealing the limita- 
tion or raising the limit. On this subject Mr. Chester B. 
Masslich, a well-known specialist, has said: 

"Perhaps the worst form of tax limitation is the general 
limitation which fixes the maximum rate of annual tax for all 
purposes. If the amount raised by such a tax is insufficient 
to pay running municipal expenses and also the principal and 
interest of outstanding bonds, the courts hold that the pay- 
ment of running expense comes first, and that the creditors 
can have no part of the taxes which the municipal authorities 
in their discretion choose to apply to those expenses. In 
other words, the maintenance of the life of a municipality is 
its first duty and the courts will not disturb the judgment of 
its governing body as to the amount necessary for main- 
tenance. 

"There are many laws on the statute books today which 
fix so high a limit upon the amount of bonds which may be 
issued, and so low a limit upon the amount of taxes that may 
be levied to pay them, that it is a foregone conclusion that 
the bonds will not be enforceable if the entire amount allowed 
by law be issued. . . . 

"North Carolina is one of the States which have seen the 
error of limits upon bond taxes. With few exceptions, all 
the general and special laws passed in that State in recent 
years granting authority for bond issues, have expressly pro- 
vided that the tax for their payment shall be unlimited. 
South Carolina has followed the same new policy. Georgia 
has long since removed all limits upon bond taxes by consti- 
tutional enactments which make mandatory a sufficient levy 
without any limit whatever, and as a result the bonds of 



PROMISE AND PURPOSE OF BOND 69 

Georgia counties and municipalities find a ready sale. 
Georgia's taxpayers have not suffered, for the same section 
of the constitution which requires the unlimited tax puts a 
rigid limit upon the amount of lawful debt that may be 
created. 

"Across the line from Georgia, Alabama still labours 
under a constitutional limit of bond taxes, with the result that 
investors pay little attention to public securities coming from 
that State." 3 

Legality independent of power to pay. — It is a curious 
fact that the validity and legality of a bond may be inde- 
pendent of the power to pay it. In one jurisdiction this doc- 
trine was at one time applied. The Supreme Court of North 
Carolina said in substance that a bond may be in all respects 
validly and legally issued and constitute a valid obligation of 
a municiplity even though a sufficient tax levy to provide for 
the payment of principal and interest has not been, and pos- 
sibly cannot be, made. 4 This ought not to be so, and it is 
reassuring to observe that the doctrine has been repudiated 
in the same jurisdiction. 5 

Assessment bonds. — These may be limited to specified 
funds. Usually they are issued to provide the funds for local 
improvements, such as sewers or sidewalks. The property 
benefited becomes liable for all or part of the cost of the 
improvement. The municipality undertakes only to levy the 
assessments which are to provide the fund for repayment. If 
the value of the property benefited and liable should not be 
sufficient to meet the obligation, the municipality would not 
have any further liability. 

This is true only where the faith and credit of the munici- 
pality are not pledged to the payment of the debt, or where 
the municipality has not the power by statute to pledge its 
faith and credit. Assessment bonds issued in New York and 
New Jersey are, as between the bondholder and the munici- 
pality, general obligations of the municipality, supported by 
its unlimited taxing power. As between the municipality and 
the property owner, however, the property especially bene- 
fited must pay the bonds. 

8 Quoted in the Daily Bond Buyer, December 5, 1921. 

4 Pitt County v. MacDonald (N. C. 1908), 148 N. C. 125; 61 S. E. 643. 

6 Proctor v. Nash County (N. C. 1921), 108 S. E. 360. 



70 MUNICIPAL BONDS 

Assessment bonds not negotiable instruments. — Where 
the instrument is payable solely from a special fund, the bonds 
are not negotiable instruments. 

"Respecting the question of the negotiability of these 
instruments, it has been held that because the bonds are not 
payable unconditionally and at all events, but only out of a 
special fund created for and pledged to the payment, which 
may or may not prove adequate to meet the obligations in 
full, they do not have that certainty of payment which is 
essential to negotiability, and that they are not negotiable 
instruments within the Law Merchant. Being deprived, 
according to these decisions, of one of the characteristics of 
negotiability by the uncertainty of payment, improvement 
bonds of this nature have been held to be mere choses in 
action, and in the hands of a purchaser for value, without 
notice, subject to all the defenses to which they are subjected 
in the hands of the contractor or person to whom they were 
originally issued." 6 

As pointed out in Chapter I, consequences important to 
the bondholder follow the negotiability of the instrument. 
Unless the bond is fully negotiable, it is not in fact a munici- 
pal bond as the term is employed, and it should not sell on 
the same basis as a fully negotiable bond. 

Federal tort theory. — An interesting gloss on this state- 
ment is afforded by consideration of a doctrine which Frede- 
rick P. Delafield has aptly named the "Federal Tort Theory." 
Briefly stated, it is this : If a municipality makes a contract 
or issues a bond payable only from assessments and then fails 
to levy the assessments or to collect them, the municipality 
becomes liable. 7 The consequences of this theory are ex- 
tremely interesting, but belong to a more exhaustive con- 
sideration of the subject than can be given here. 

In Chapter XI it is pointed out that the bondholder may 
obtain the money represented by the bond in an action on 
contract where the bond is not enforcible as such. 

Limitation of area. — Limitation because of the area taxed, 
is illustrated by issues of New York town bonds for sewer 
purposes. Under the law 8 sewer districts may be organized 
and the property within them assessed to pay the cost of the 

6 Dillon, p. 1392. 

'Barbour Asphalt Co. v. Denver (1896), 72 Fed. 336. 

8 Cons. Laws, Chap. 62, Sec. 360. 



PROMISE AND PURPOSE OF BOND 71 

improvement. The bonds, however, are issued by the town 
which is only secondarily liable and may be held liable only 
if there is a shortage in the primary fund. 

In conclusion we may say that a true municipal bond must 
contain a full and unqualified promise to pay, not only in 
words but in contemplation of law. The opinion of counsel 
is understood to mean that there is such a promise. An Ohio 
court has recently said: 

"But I assume that 'legality' means something more than 
the mere formality of issue. It means the expression of a 
perfect obligation; that the bonds shall not be merely the 
expression according to legal form, perfect in its intonation 
and following all the regulations; but that the result of these 
formalities shall be the creation of an obligation on the issu- 
ing of those securities that is perfect so that the buyer shall 
have no concern about the security returning both his income 
and investment. That, therefore, involves the construction 
of the entire law that relates to the creation of the obligation 
and in the opinion of counsel the limitations which the laws 
of Florida fix upon a municipality are such that in this case 
there is an imperfect obligation. That is precisely the ques- 
tion intended to be submitted to him; so that he has expressed 
the sentiment of those who deal in these securities and given 
to the purchaser the opinion of the profession with regard 
to the security that the obligation created. Now it matters 
not that these bonds could be pursued to a judgment. You 
may have as many judgments as you can get, but only one 
satisfaction. It is not the ability to secure a judgment, but 
it is the perfection of the security of the investment which 
constitutes its legality; and here counsel, in good faith and 
true to their client, have given their opinion that they should 
not approve the bonds." 9 

As a mere matter of mathematics, a limited tax rate may 
produce ample revenue to run the municipality and to provide 
funds for debt service, but increasing demands for general 
service or a conflagration or a flood may impair the margin 
of safety or even destroy the value of taxable property. The 
municipal revenue may diminish and as the municipality must 
live before it pays its debts, a default must inevitably result. 

Purpose of issue. — Text writers have classified bonds as 

9 A. T. Bell v. Plant City, Fla. Decision not reported; Lucas Co., Ohio, 
Common Pleas, Oct. 7, 1920. 



72 MUNICIPAL BONDS 

to purpose. This classification has no meaning, except that 
bonds issued for self-sustaining or partially self-sustaining 
public utilities have a factor of safety that bonds issued for 
non-revenue producing improvements may not have. Water 
works, especially systems operated by gravity, should pro- 
duce enough revenue to pay operating expenses and the in- 
terest and principal of maturing bonds. This is recognized 
by many statutes, which permit deduction of such bonds in 
computing the borrowing power of the municipality. The 
same principle extends to bonds issued for wharves, docks 
and markets. A familiar example exists in bonds issued by 
New York City for the purpose of securing funds for the 
construction of rapid transit facilities. Under properly 
drawn statutes, such bonds may be deducted in computing 
borrowing power only to the extent that the income from 
the utilities provides sufficient funds for debt service. When 
such income becomes insufficient, the bonds must be charged 
against the limit of indebtedness. In a limited sense, streets 
and sewers, schools, hospitals and parks add to the revenue- 
producing power of the municipality, but so very remotely as 
not to affect the means of payment or security for the bonds. 
Term of bonds. — Term in relation to purpose is consid- 
ered in Chapter IX devoted to term and serial bonds. 



Chapter IX 
THE MATURITY OF THE BOND 

Classification according to time of payment. — Classifica- 
tion of bonds may be according to the time of payment, or 
maturity, one of the most important factors in determining 
price, which is considered in Chapter XIV. 

Short-term loans. — Bonds, certificates of indebtedness, or 
notes, running, let us say, less than five years, are called short- 
term obligations, and are considered from a far different 
angle than are the long-term or serial bonds. The short-term 
loan is usually self-liquidating, being issued in anticipation of 
taxes or other revenues, and commercially is treated as a 
liquid asset. Our concern is not with short-term loans as such. 

Determination of time of payment. — The time of pay- 
ment of any bond depends upon the language of the statute 
authorizing it, for the reason that most statutes prescribe a 
maximum maturity for bonds, and a bond which purports to 
run for longer than the permitted term is illegal. While 
certain classes of foreign government securities are not pay- 
able at any definite time, it has been the practice, as well as 
the law, ever since American municipalities have been issuing 
bonds, to make them absolutely due and payable within a 
relatively limited period of years. Very few municipal bonds 
have a life of over fifty years from the date of issue. Con- 
sidered as to maturity, bonds are of two kinds: 

Term bonds. — Term bonds are those of an issue of which 
all the bonds become due and payable at one time. For 
example, $100,000 bonds dated May, 1922, may all mature 
and be due and payable May 1, 1952, in which case the term 
or life of the bond is 30 years. For the reasons hereafter 
referred to, the issue of term bonds is becoming less and less 
frequent and the issue of serial bonds is made mandatory by 
statute. 

Callable bonds. — Callable bonds, sometimes called re- 
deemable or optional bonds, are term bonds which may be 

73 



74 MUNICIPAL BONDS 

called for payment before their maturity. This is in order 
that the issuing municipality may redeem its indebtedness if 
it chooses to exercise the option, without being obliged to do 
so. Such bonds may be redeemed, if the issuing municipality 
so decides, 15 or any number of years after their issue, but 
may not be absolutely due and payable until, for example, 30 
years thereafter. A bond redeemable after 15 years and pay- 
able at the end of 30 years after issue is called a "15-30." 
So a bond redeemable in 5 years and payable in 20 years after 
issue would be called a "5-20." 

Notice of prior redemption. — The bond form should con- 
tain a provision that the issuing municipality, if it desires to 
exercise its option of prior redemption, will give notice to the 
bondholder a certain number of weeks or months in advance 
of the optional date. Provision is usually made to give this 
notice by publication in one or more designated financial 
newspapers. As a matter of fact, such notice, called con- 
structive, is not always brought to the attention of the bond- 
holder. Notice of intention to redeem is intended to enable 
the municipality to call the bonds for payment, and interest 
usually stops with the giving of such notice. The notice 
also permits the bondholder, if he is fortunate enough to 
receive it, to find a new investment for his money, as he has 
been warned that his bonds will be paid. 

The issue of callable bonds indicates a very high degree 
of optimism upon the part of the municipal officials. Very 
few of such bonds are called for payment before their ma- 
turity. They do not sell at the same price as they would for 
the term without the optional feature, since for the purpose 
of computing the selling price or basis, the bond is treated as 
running only to the optional date and not to maturity. Thus 
a "15-30" bond sells as though it were a 15-year term bond. 
Such bonds are not as desirable as the straight term or serial 
bond. 

Sinking funds. — It has been explained that bonds are paid 
from the proceeds of taxation. If a municipality was per- 
mitted to issue a considerable amount of bonds to run for 
several years, with no provision for the payment of the bonds 
before they mature, the amount of money which would have 
to be raised to pay the bonds in the year of their maturity 
would not only send the municipal tax rate sky-rocketing, but 
the amount might conceivably be so large that it could not be 



THE MATURITY OF THE BOND 75 

raised by taxation. Hence, at an early period, the principle 
of the sinking fund was applied to municipal financing. A 
sinking fund is formed by setting aside a sum of money at 
stated intervals to provide for the payment of all or part of 
the principal of a debt. It is a method of sinking or extin- 
guishing it; a provision for an obligation not yet matured. 
The practice may be illustrated by saying that, if a bond runs 
for 30 years, 3 1/3% of the amount of the bond is annually 
included in the tax levy, and when the tax is paid, the amount 
is turned over to a particular municipal official, or a group 
of officials, called the Sinking Fund Commission. Statutes 
which permit the issue of term bonds require such provision 
for the payment of the bonds to be made. If the ordinance 
or statute authorizing the bond issue provides for a sinking 
fund, this provision is part of the contract between the munici- 
pality and the bondholder, and the rights of the latter to 
insist upon the protection of the sinking fund cannot be im- 
paired by any subsequent legislative enactment 1 or act of the 
issuing municipality. This is so because of the constitutional 
guarantees against impairing the obligations of contracts. A 
standard sinking fund clause or contract follows this chapter, 
and an examination of it will show the principles upon which 
the sinking fund operates. 

Annual contributions to sinking fund. — The amount 
raised each year for sinking fund purposes is determined 
arithmetically, and various tables are used to compute the 
amount. The table authorized by the commissioner of mu- 
nicipal accounts in New Jersey computing on a 3^2% annual 
cumulative basis is given at the end of this chapter following 
the model sinking fund clause above referred to. The annual 
sinking fund requirements for t*ie issue of term bonds is 
found by multiplying the amount opposite the stated term of 
the issue, by the number of one-thousand-dollar bonds; thus, 
referring to the table, it will be seen that if a one-thousand- 
dollar bond runs for five years, the amount contributed an- 
nually will be $186.4814. The table assumes that interest 
on the sinking fund investments will be compounded semi- 
annually. The annual contributions to the sinking fund must 
be invested promptly, together with the interest on all sinking 
fund investments, at a rate of return at least equal to the 
percentage used in the table fixing the annual contribution, 

Dillon, p. 195. 



76 MUNICIPAL BONDS 

in order to produce the necessary amount at the date of 
maturity. 

Misuse of sinking funds. — Simple as all this is in theory, 
the difficulty with the sinking fund plan is that it is not care- 
fully followed and observed except in the best municipal 
families. "To the student of municipal finance, with a sense 
of humour," says Professor Jordan, u city sinking funds afford 
a subject of pleasurable research. Sinking funds have been 
notoriously misused for purposes absolutely foreign to their 
object. * * * Many cities require that sinking fund moneys 
be used exclusively for the purchase of bonds of the same city, 
without requiring that the bonds be of the same issue as that 
for which the fund is created*- The city, desiring money at a 
later date, figuratively takes some new bonds out of its right- 
hand pocket and exchanges them for sinking fund cash in its 
left-hand pocket, and thereupon proceeds to pay itself interest 
on the bonds. Such a transaction scarcely belongs to the 
twentieth century." 2 

For a city to invest its sinking funds in its own securities, 
suggests an individual securing his promissory note by the 
deposit of another. By doing so, it withdraws cash raised 
for the protection of the bondholder. It is hardly necessary 
to call to mind the plan of the comptroller of the State of 
New York to pay the soldiers' bonus from moneys on hand 
in the sinking fund, and later to reimburse the sinking fund 
when the bonus bonds were sold. 3 This happy thought was 
upset by a hard-hearted court of appeals which declared the 
State Bonus Bond Act unconstitutional. 

Advantages of the sinking fund. — But a sinking fund 
which is not properly managed, or of which the principal is 
not kept at par, is better than none at all. The psychological 
effect on the minds of officials should not be ignored, for a 
consideration of sinking fund requirements when the annual 
budget is being made up is a reminder that debts must be 
paid. Sinking fund trustees are held to a very high degree 
of accountability and the investment banker who merchan- 
dises an issue of sinking fund bonds may well consider that 
he has at least a moral duty to remind officials that the 
annual contribution must be raised and paid in. 

One great advantage which the sinking fund plan has is 

2 Jordan on Investments, p. 81. 

3 The Daily Bond Buyer, Sept. 3, 1921. 



THE MATURITY OF THE BOND 77 

that the annual payments for interest and principal remain 
constant each year from the date of issue to the date of 
payment. 

Under the sinking fund plan a uniform tax rate over a 
period of years will pay the interest and retire the bonds 
when they become due, provided the assessed valuation re- 
mains constant. As taxable valuations usually increase rap- 
idly after extensive improvements have been made, there does 
not appear to be any particular advantage in a uniform tax 
rate. The tax rate will adjust itself to the valuation of tax- 
able property and the needs of the community. , — __ 

Serial bonds. — Serial bonds are those which mature in 
substantially equal annual installments during the life of the 
issue. A certain number therefore are redeemed annually, 
through application of the proceeds of taxes raised for that 
purpose. The serial plan of payment is an advantage because 
it avoids the sinking fund which is frequently open to so much 
criticism. 

Equal annual installments. — Serial bonds are frequently 
required to be made payable in equal annual installments. 
This is to be avoided if possible, for such a rigid requirement 
frequently compels the municipality to issue bonds of odd 
denominations and sometimes in principal amounts expressed 
partly in cents. For example, a small issue payable in equal 
annual installments may mature $1,142.34 in each year. If 
the statute uses the expression "substantially equal annual 
installments," there is no necessity for such meticulous ac- 
curacy. It may be observed that where all the bonds of a 
municipality are required to mature in the same number of 
equal annual installments, as is the case with New York and 
Pennsylvania second class cities, a fairly even debt service 
results. The increased borrowing each year is offset by pay- 
ments of principal and increases in assessable valuations. 

The custom of issuing serial bonds is becoming increas- 
ingly common. It is mandatory in Massachusetts, New Jer- 
sey, New York, North Carolina, and many other States. The 
price is based on the average of the price of each maturity, 
figured separately. An issue maturing one thousand dollars 
a year for twenty years will have an average maturity of 
substantially ten years. 

For an illustration of the prices of different maturities of 
the same issue of bonds, see copy of the advertisement appear- 



^> 



78 MUNICIPAL BONDS 

ing on page 144. When securities sell above par, the longer 
the maturity the higher the value of the bond, since the time 
is longer in which to amortize the premium. 

Advantages of the serial bond. — The great advantage 
of the installment bond is that no sinking fund with its 
attendant abuses is necessary or possible. In a sense, the 
serial plan is an automatic, mathematically correct sinking 
fund. That is, the amount required to be raised by taxation 
each year for debt service is the principal of the bonds matur- 
ing that year plus the interest payable during that year on 
all the bonds of the issue then outstanding and unpaid. The 
last table following this chapter shows the difference between 
the average annual cost and the total cost of sinking fund 
and serial bonds. In the table the sinking fund is assumed 
to be invested and compounded annually at 3y 2 % where the 
coupon rate on the bonds to be paid is 5%. In practice it 
is doubtful whether any but the most expertly managed sink- 
ing funds are invested to yield more than an average of 
3y 2 %. Mathematically, the burden of taxation for the pay- 
ment of serial bonds is identical with the cost under the sink- 
ing fund plan, if the sinking fund earns and is compounded 
at the same interest rate as is borne by the bonds. 

Before dismissing the subject of sinking funds, attention 
is called to the copy of the annual report of the Sinking Fund 
Commission of Clifton, New Jersey, dated December 31, 
1921, which follows this chapter. This is displayed not 
necessarily as being a model, but as showing clearly the opera- 
tion of a sinking fund in a small city, subject to extremely 
strict statutory regulations of sinking funds. 

Deferred serial plan. — Under the serial plan, a certain 
amount of the bonds is retired each year, the interest is paid 
on the remaining amount outstanding, and the retired bonds 
cease to be an interest charge on the community. The 
straight serial method requires the heaviest payments for 
interest and retirement of principal in the early years of the 
bond issue, often before the improvement is fully completed 
or before it has yielded the community any advantage. To 
meet these conditions, which frequently arise, the use of the 
deferred serial bond has become common. With such a 
modified type, no principal is retired until a certain period, 
usually five years, has elapsed. During this period, interest 
is paid but nothing more. Thereafter, the principal is re- 



THE MATURITY OF THE BOND 79 

tired by uniform amounts and the interest charges are met, 
just as in the case of serial bonds having a term shorter by 
five years, or whatever the deferred period may be. In this 
way the municipality pays nothing but interest until the im- 
provement is completed and taxes are levied and collected. 
Interest may be paid from principal during the construction 
period. The postponement of the payment of principal is 
particularly important when the bonds are paid from assess- 
ments, as is the case with irrigation district or similar issues. 

Term related to life of improvement. — The statutes of 
some jurisdictions, like New Jersey, North Carolina, and 
Massachusetts, provide that the maximum life of the bonds 
shall not exceed the life of the improvement, such life being 
arbitrarily determined by statute or by the certificate of an 
official, such as the city engineer. The New Jersey 4 and 
North Carolina 5 bond acts contain elaborate provisions, giv- 
ing the maximum terms of bonds which may be issued for 
different classes of public improvements. Under the New 
Jersey act, for example, bonds issued for the construction of 
a fire-proof building (which is carefully defined) must ma- 
ture within forty years and those for the construction of a 
road of sand or gravel must mature within five years. 

The New Jersey and North Carolina statutes provide 
that where bonds are to be issued for more than one improve- 
ment, an average shall be computed, taking into consideration 
the probable life of each improvement and the amount of 
money required therefor. 

It is believed that the best modern thought on the subject 
of municipal financing requires that the term of bond issues 
shall not exceed the life of the improvement, so that the 
burden of the improvement will not have to be borne by per- 
sons who do not enjoy its benefits. It is also obvious that the 
longer the bonds run, the greater the interest charge, which 
in the case of bonds having a long term, may greatly exceed 
the principal itself. 

Sinking Fund Clause or Contract 

Until the principal and interest of the bonds shall be fully paid, there shall 
be raised and collected annually by tax upon all of the taxable property in the 
municipality, beginning with the next tax levy a sum sufficient to pay the inter- 

4 P. L., 1817, p. 803; 
6 Appendix B. 



80 MUNICIPAL BONDS 

est on all of said bonds outstanding, as such interest becomes due and a further 
sum to be paid into a sinking fund sufficient to retire said bonds at maturity. 
The amount to be raised annually to pay the interest on said bonds shall be not 
less than the amount of one year's interest on the amount of bonds outstanding. 
The amount to be raised in the next annual tax levy for said sinking fund shall 

be at least dollars for each one thousand dollars of said bonds, and 

thereafter the trustees of the sinking fund shall each year ascertain the amount 
of said fund by appraising the securities held for investment therein at their 
fair market value not exceeding par, and shall determine the amount of money 
which, if thereafter annually contributed to said fund, would with the fund and 
with the accumulations thereon and upon the contributions thereto, such accumu- 
lations being computed at the rate of four per centum per annum, produce at 
the date of maturity the amount of the bonds outstanding, and the amount of 
money to be raised and contributed to said sinking fund in such year shall be 
at least the amount thus determined. If the income of the sinking fund in any 
year be more than the sum which, if annually added to the said fund, would, 
with the fund and its cumulations as aforesaid, retire the outstanding bonds at 
maturity, the excess income may then be applied to the interest on the bonds. 
If the sinking fund shall equal in amount the bonds outstanding, no further 
contributions need be made thereto except to make good any loss ascertained at 
the annual appraisals and the income thereof shall be applied to the payment 
of the interest on said bonds. The sinking fund shall be separately kept and 
shall be safely invested under the direction of the trustees thereof in securities 
in which savings banks of this municipality are by law authorized to invest or 
shall be applied to the purchase or cancellation of the bonds aforesaid. No 
moneys raised for the payment of the principal and interest of said bonds shall 
be appropriated or used for any other purpose. 

Table Showing Annual Sinking Fund Requirements for 
Each $1,000 Bond 

Term (years) Amount 

1 $1,000.0000 

2 491.4005 

3 321.9342 

4 237.2511 

5 186.4814 

6 152.6682 

7 125.5445 

8 110.4767 

9 96.4460 

10 85.2414 

11 76.0920 

12 68.4840 

13 62.0616 

14 56.5707 

15 51.8251 

16 47.6848 

17 44.0431 

18 40.8168 

19 37.9403 

20 35.3611 



THE MATURITY OF THE BOND i 

Term {years) Amount 

21 33.0366 

22 30.9321 

23 29.0188 

24 27.2728 

25 25.6740 

Table Showing Comparative Cost of Serial and Sinking 
Fund Plans 6 

$100,000 5% BONDS 



ANNUAL 


AVERAGE DEBT SERVICE 


TOTAL 


COST 


Tturing in 


3]/2% Sinking 


Serial 


3%% Sinking 


Serial 


years 


Fund 




Fund 




5 


$23,648 


$23,000 


$118,241 


$115,000 


10 


13,524 


12,750 


135,241 


127,500 


15 


10,183 


9,333 


152,738 


140,000 


20 


8,536 


7,625 


170,722 


152,500 


25 


7,567 


6,600 


189,185 


165,000 


30 


6,937 


5,917 


208,114 


177,500 


35 


6,500 


5,429 


227,494 


190,000 


40 


6,183 


5,063 


247,309 


202,500 


45 


5,945 


4,778 


267,540 


215,000 


50 


5,763 


4,550 


288,169 


227,500 



Sinking Fund Commission 
Clifton, New Jersey 

December 31, 1921. 
To the City Council of the City of Clifton, 
New Jersey. 

Gentlemen, — In accordance with the requirements of the Sinking Fund 
Law of the State of New Jersey, the Sinking Fund Commission of the City of 
Clifton herewith transmits its statement of the Sinking Fund account for the 
year 1921. 

BALANCE ON HAND JANUARY 1, 1921 

Cash on Deposit, Clifton Trust Co , $ 111.63 

$32,000 U. S. L. Bonds Second Issue 4% 28,934.97 

$ 2,000 U. S. L. Bonds Third Issue 4*4 1,871.60 

$15,500 U. S. L. Bonds Fourth Issue 4^ 14,733.24 



Total Sinking Fund, January 1, 1921 

RECEIPTS FOR YEAR 1921 

Mar. 21. Interest on $ 2,000 Third Liberty 
Apr. 18. Interest on $14,000 Fourth Liberty 
Apr. 18. Interest on $ 1,500 Fourth Liberty 
May 18. Interest on $32,000 Second Liberty 
Sept. 23. Interest on $ 2,000 Third Liberty 
Oct. 19. Interest on $15,500 Fourth Liberty 
Nov. 21. Interest on $33,000 Second Liberty 
Nov. 1. Interest on Bank balance to Nov. 1, 

6 From Engineering News-Record, August 30, 1917. 



.$45,651.44 



Bonds. . 


$ 42.50 


Bonds. 


297.50 


Bonds. 


31.87 


Bonds. 


680.01 


Bonds. . 


42.50 


Bonds. 


329.38 


Bonds. 


701.24 


, 1921.. 


6.87 



82 MUNICIPAL BONDS 

1921 Appropriations for Sinking Fund 

Dec. 8. From City Treasurer— General Bonds 3,118.78 

Dec. 8. From City Treasurer — School Bonds 4,679.46 

Dec. 8. From City Treasurer— Special Sinking Fund 3,772.78 



Total Receipts Year 1921 $13,702.89 

DISBURSEMENTS: 

July 7. Accrued Interest on purchase $1,000 Second 

Liberty Bonds 6.26 

Dec. 8. Accrued Interest on purchase $13,000 Second Lib- 
erty Bonds 36.83 



Total Disbursements $ 43.09 

Net Amount Added to Sinking Fund 13,659. 



NET SINKING FUND DECEMBER 31, 1921 $59,311.24 

INVESTMENTS HELD BY COMMISSION 

On December 31, 1921, the total Sinking Fund of $59,311.24 was invested 
as follows: 

$46,000 Par Value U. S. Second Liberty Bonds, 4% $42,436.22 

$ 2,000 Par Value U. S. Third Liberty Bonds, 4*/ 4 1,871.60 

$15,500 Par Value U. S. Fourth Liberty Bonds, 4*/ 4 . '. 14,733.24 

Balance in Clifton Trust Co., December 31, 1921 270.18 



$59,311.24 
Average Rate of Interest on Investments 4.57549 per cent. 

The following statement shows the amount of sinking fund monies 
credited to the various issues of long term bonds as of December 31, 
1921, in comparison with the amounts that should have been available on 
that date for each issue under the law: 

Surplus Over Deficit Below 
Legal Re- Amount in Legal Require- Legal Re- 
quirements Sinking Fund ments quirements 

GENERAL BONDS 

$131,000 Trunk Sewer, 4% $19,741.34 $20,167.50 $ 426.16 

$ 30,000 Municipal Bldg., 4y 2 .... 4,520.92 4,678.79 157.87 

$ 50,000 Tem. Sew. Bds., 6%, dated 

July 1, 1921 

SCHOOL DIST. BONDS 

$95,000 School, 4V 2 , dated May 1, 

1914 31,644.69 14,914.25 16,730.44 

$19,900 Three Issues, School, 4Y 2 , 

May 1, 1907 11,405.31 2,517.87 8,887.44 

$28,000 Two Issues, School, 5%, 

July 1, 1908 10,471.51 1,855.97 8,615.54 

SPECIAL SINKING 

FUND 
To wipe out deficit — 

School Bonds 15,176.86 15,176.86 



$77,783,77 $59,311.24 $15,760.89 $34,233.42 



THE MATURITY OF THE BOND 83 



SUMMARY 

Legal Requirements $77,783.77 

Amount in Sinking Fund $ 59,311.24 

Deficit to be taken care of through Special Sinking Fund 18,472.53 

$77,783.77 

Deficit $34,233.42 

Surplus 15,760.89 



$18,472.53 



Annexed to this report is detailed information concerning the funded 
indebtedness of the City of Clifton. 

The Sinking Fund Commission has authorized the Secretary of the Com- 
mission to have this report printed in full for distribution in accordance with 
the Sinking Fund law. 

Respectfully submitted, 

SINKING FUND COMMISSION: 

(Member ex-officio) 

(Term expires ) 

NO APPOINTMENT 



TOTAL BONDED DEBT OF THE 
CITY OF CLIFTON, N. J. 

The entire bonded debt of the City on December 31, 1921, was as 
follows: 

General Bonds: 

Temporary Sewer Bonds 6%, 1327 $ 50,000 

Trunk Sewer 4%'s, 1945 131,000 

Trunk Sewer 5's Serial 25,000 

Municipal Building 4%'s, 1945 30,000 

Total General Bonds $236,000 

School Bonds: 

Sinking Fund Bonds $142,900 

Serial Bonds 425,000 

Total School Bonds $567,900 

Total bonded debt December 31, 1921 $803,900 

The bonded debt of the City of Clifton was increased during the year 1921 
by $155,000 net. 



84 MUNICIPAL BONDS 

STATEMENT SHOWING THE AMOUNT OF BONDS TO BE 
PAID OFF ANNUALLY AND THE AMOUNT OF INDEBTED- 
NESS AT THE END OF EACH YEAR, BASED ON THE 
INDEBTEDNESS AS OF DECEMBER 31, 1921 



Bonds to be paid Bonded Indebtedness 

Year Serial Bonds off through December 31 each 

to be paid off Sinking Fund year after payments 

1922 20,000 783,900 

1923 19,500 1,000 763,400 

1924 19,500 1,000 742,900 

1925 18,000 1,500 723,400 

1926 18,000 6,000 699,400 

1927 18,000 56,000 625,400 

1928 18,000 6,000 601,400 

1929 18,500 6,000 576,900 

1930 18,500 7,000 551,400 

1931 14,000 9,000 528,400 

1932 14,000 9,000 505,400 

1933 14,000 9,000 482,400 

1934 14,000 9,000 459,400 

1935 14,000 9,000 436,400 

1936 14,000 8,400 414,000 

1937 14,000 7,000 393,000 

1938 14,000 7,000 372,000 

1939 14,000 7,000 351,000 

1940 14,000 7,000 330,000 

1941 12,000 7,000 321,000 

1942 13,000 7,000 291,000 

1943 13,000 7,000 271,000 

1944 13,000 6,000 252,000 

1945 12,500 161,000 78,500 

1946 12,000 66,500 

1947 11,000 55,500 

1948 8,000 47,500 

1949 6,000 41,500 

1950 5,000 36,500 

1951 5,000 31,500 

1952 4,500 27,000 

1953 3,000 24,000 

1954 3,000 21,000 

1955 3,000 18,000 

1956 3,000 15,000 

1957 3,000 12,000 

1958 4,000 8,000 

1959 4,000 4,000 

1960 4,000 

$450,000 $353,900 

Serial Bonds $450,000 

Sinking Fund Bonds 353,900 

Total Bonds $803,900 



Chapter X 
SALE AND AWARD 

Actual operation one of bargain and sale. — While money 
is borrowed by the municipality and in contemplation of law 
its bonds issued to evidence the loan, the actual operation is 
that of bargain and sale. Express statutory authority to 
issue bonds implies the power to sell them in the ordinary 
and usual manner; and the municipality may, by virtue 
thereof, sell the bonds and use the proceeds for the purpose 
intended, that being the mode most generally adopted in simi- 
lar cases. 1 

Private sale. — A private sale of bonds as distinguished 
from a public sale means substantially that the municipality 
is not required to give public notice of an intended sale nor 
to ask for competing offers or bids. Ordinarily we find pri- 
vate sale forbidden by statute (because public sale is required) 
but permitted in certain cases. When it is not expressly for- 
bidden it is permissible. As to short-term paper, public sale 
is not ordinarily required. The advantage of private sale 
to the municipality is that it may act promptly when market 
conditions are favourable. The advantage to the broker is 
obviously lack of competition and because of this a larger pro- 
spective profit. The disadvantage to the municipality is the 
possibility of an unconscionable bargain, because of the igno- 
rance of public officials. While actual fraud is seldom prac- 
ticed, it is obvious that an alert buyer, fully informed of mar- 
ket conditions, is apt to have municipal officials at a decided 
disadvantage. There are no disadvantages to the broker in 
a private sale. 

Public sale. — Public sale of long-term securities is required 
by most statutes. A public sale is one of which public notice 
is required by advertising. It is advantageous to the munici- 
pality because free competition is more apt to result in the 
offer of the market price. The fact that there is competition 

1 Dillon, p. 1398. 

85 



86 MUNICIPAL BONDS 

and publicity is a protection to municipal officials both against 
fraud and unconscionable bargains and against their own 
credulity or lack of information. 

Bidders may be requested to submit propositions for the 
purchase of the bonds: 

(a) Naming the price which they will pay for the entire 
issue, in which case the award will be to the bidder offering 
the most money. 

(b) Naming the lowest interest rate at which they will 
take the issue, in which case a bidder who will take A]/ 2 °/o 
bonds will secure the award in preference to other bidders 
who offer to take 4^4% bonds. A variation of this plan is 
to ask for bids at the lowest interest rate plus the greatest 
premium, (generally the price above par one hundred), bid 
must be very carefully studied and particular care taken to 
see that the offer complies with its terms. 

(c) Naming the least amount of bonds the bidder will 
take and pay therefor the amount necessary to be raised and 
a premium in addition. This form of bid is discussed later. 

Disadvantages of a public sale. — A public sale has its dis- 
advantages. The period of advertising the notice of sale is 
ordinarily too long. To secure needed publicity, a week or 
more must elapse between the public offering and the receipt 
of bids, and the award. The lapse of time may result in the 
loss of an advantageous market. It may also work the other 
way. In determining the proposed interest rate, a forecast 
must be made of the market conditions likely to obtain at 
and after the time of sale. In 1920 a very large offering by 
an eastern municipality was being advertised just as the Bol- 
shevist army threatened to enter Warsaw. By the day of 
sale the threatened danger to Warsaw had passed and the 
ensuing feeling of optimism resulted in a premium so large 
that as it turned out the bonds would have sold at a lower 
interest rate. 

Public notice. — Where public notice is required, a mistake 
in advertising may make the sale irregular. Re-advertising 
must follow the statutory course. Thus an advantageous 
market may be lost. 

The New York statute governing public sale. — The New 
York statute governing public sale is typical of the provisions 
found in most jurisdictions. "All bonds hereafter issued by 
any municipal corporation, or by any school district or civil 



SALE AND AWARD 87 

division of the State, shall be sold, in the case of a city of 
the first class as required by its charter or by any special act 
under which such bonds are issued, in the case of a city of the 
second class as required by section sixty-one of the second 
class cities law, and in all other cases at public sale not less 
than five or more than thirty days after a notice of such sale, 
stating the amount, date, maturity and rate of interest, has 
been published at least once in the official paper or papers, if 
any, of any such municipality, provided that if there is no 
official paper, then such notice of sale shall be published in a 
newspaper published in the county in which such bonds are to 
be issued, or a copy thereof shall be sent to and published in a 
financial newspaper published and circulating in New York 
City." 2 

The New Jersey plan. — New Jersey has evolved a plan 
peculiarly its own. It has been observed by students of mu- 
nicipal finance that municipalities have not always applied the 
premium, the price above par (generally one hundred) bid 
for the bonds, to the purpose for which the bonds are issued. 
Instances of gross abuse have been common. Some years 
ago, a New York city, desiring to obtain money for cur- 
rent expenses, refunded a large amount of its debt and de- 
liberately made the interest rate much higher than market 
conditions required. A large premium resulted, and instead 
of being applied to the purpose for which the bonds were 
issued or placed in the sinking fund, this premium found its 
way into the municipal till and was used for current expenses. 
To prevent this sort of thing, the New Jersey statute 3 now 
provides that the notice of sale must state the amount of 
money necessary to be raised. The bidder is required to state 
the number of bonds he will take, bidding therefor the amount 
of money necessary to be raised and an additional sum of 
less than one thousand dollars. Suppose, for instance, that 
one hundred bonds of one thousand dollars each are offered 
for sale and the amount of money required to be raised is one 
hundred thousand dollars. A bidder may offer to pay one 
hundred thousand nine hundred dollars and to take therefor 
ninety-nine bonds. This plan has worked advantageously in 
practice and has resulted in abolishing premiums of more than 
nominal amounts. 

2 Cons. Laws, Chap. 24, Sec. 9. 

3 P. L. 1917, p. 803, as amended. 



88 MUNICIPAL BONDS 

Par means the amount of the face of the bonds and 
accrued interest from the date of the bonds to the date of 
delivery. Most statutes require that sales be made at not less 
than par. It is clear that unless a controlling statute provides 
to the contrary, a municipal bond may be sold at any price 
not so low as to make the sale usurious. 4 

Persons purchasing the bonds from the municipality are 
bound to take notice of the power of the municipality in this 
respect, and a sale of bonds at less than par is absolutely 
void between the parties if expressly prohibited by law. 
Neither party to the contract is bound thereby, and it cannot 
be the subject of a valid claim by either against the other. 5 
If the bonds are paid for and in the hands of the original 
purchaser, the court would compel their surrender and pro- 
vide for a refund of the purchase price. Note, however, that 
this is true only as between the parties. Our old friend the 
bona fide holder for value and without notice is protected if 
the bond is in fact a negotiable instrument and the munici- 
pality has the power to issue it. 

Par sale. — Par sale requirements seem to involve an eco- 
nomic fallacy. Money is a commodity and the price of money 
is governed by the conditions existing at the time it is bought. 
It may be said that the interest rate borne by the bonds and 
the market rate never correspond. It is, therefore, necessary, 
to be sure of obtaining bids, to fix the interest rate higher 
than the market. The bonds may then sell for a premium. 
Theoretically, if the premium is properly applied, that is, 
paid into a sinking fund and properly invested, it reduces the 
interest rate to the market rate. In practice, this rarely hap- 
pens. Par sales statutes are designed to compel the payment 
of a fair price for bonds and possibly to protect the reputa- 
tion of municipal officials against charges of making bad bar- 
gains or fraudulent bargains. Sale after public notice does 
undoubtedly prevent intentional or unintentional abuse of 
power by public officials. 

Evasion of such requirements. — During the early part of 
the year 1921, many smaller municipalities found it difficult 
to sell their shorter-term bonds at a six per cent interest rate, 
the highest rate permitted by statute. Most eastern statutes, 
and probably most bond acts, prescribe a maximum interest 

4 Kiernan v. City of Portland (Ore. 1912), 122 Pac. 764. 
6 Dillon, p. 1400. 



SALE AND AWARD 89 

rate of six per cent. If a six per cent bond is not worth par 
and the municipality cannot legally pay more than six per 
cent, the irresistible force of market conditions meets the im- 
movable wall of statute, without, however, always producing 
an impasse. In other words, par sale statutes are frequently 
evaded. 

Fiscal agency contracts. — These are popular in some parts 
of the country. By fiscal agency contract is not meant the 
bona fide contract whereby a banking institution acts as the 
disbursing agent for interest and principal, the bank some- 
times acting as depositary, 6 but substantially that the bond 
house offers, for a consideration, to buy the bonds at a certain 
price at private sale or to bid not less than a certain price at 
public sale, to furnish all legal advice necessary in connection 
with the issue and to prepare the printed bonds for execution. 
This is substantially what is known in some parts of the coun- 
try as a proceedings contract, by which the bond house offers 
certain services and receives a lump sum sufficient to permit 
it to make a reasonable, or sometimes unreasonable, profit on 
the bonds at the highest interest rate permitted by law. The 
legality of such contracts is at least questionable. 

The deposit agreement. — As a method of evasion of par 
statutes, the deposit agreement has come into vogue within 
recent years. This form of contract includes an agreement to 
deposit the purchase price of the bonds with or in a par- 
ticular depositary or to permit the purchaser to retain the 
purchase money and pay it over at fixed times in the future 
or upon request. The advantage derived is that the pur- 
chaser obtains the interest earned by the deposited purchase 
price, either in gross or in part, for such time as the deposit 
remains. 

The legality of such an agreement may turn on whether 
the purchaser is or is not a proper depositary for municipal 
funds, as a bank in the same State would be ordinarily. If 
the purchaser is a depositary bank and the fund may be with- 
drawn at any time and before withdrawal earns interest as 
other municipal funds, the deposit is lawfuL If the agree- 
ment is that the fund remain for a specified period, or earn 
less than usual interest, then either the sale is a sale on credit 
and void for that reason 7 or the provision of this agreement 

"Chamberlain, p. 519. 

'Illinois v. Delafield (1840), 8 Paige (N. Y.) 526. 



90 MUNICIPAL BONDS 

that the fund is not to be withdrawn is unenforceable. If the 
purchaser is not a depositary and cannot qualify as such, 
because of statutory or other restrictions, the agreement is 
void as a sale on credit. 8 In any event, these questions can 
affect only the immediate parties to the transaction, i.e., the 
municipal officials and the purchasing bond house. The pur- 
chaser without notice takes title free from infirmities in the 
contract of sale. 

Meeting the expense of issuing bonds. — Expenses in- 
curred in issuing bonds may ordinarily be paid out of the pro- 
ceeds of sale notwithstanding a prohibition of a sale below 
par, 9 but this depends on the statute pursuant to which the 
bonds are issued. The extent to which an allowance may be 
made to the purchaser for his expenses is not clear. Bona 
fide expenses incident to the issue of the bonds, such as print- 
ing and engraving, seem to be allowable. Allowance of other 
expenses including attorneys' fees is in doubt. If a claim for 
expenses is unreasonable in amount or is made a cloak for a 
deduction from the purchase price, it is clearly illegal. 10 If 
the expenses allowed the purchaser are legitimate, the pay- 
ment of such expenses would probably be sustained but not if 
merely a device to effect a sale below par. 

Brokerage and commissions. — These are allowable if bona 
fide but not if made a device to evade the statutory require- 
ment of a par sale. The power of a municipality to issue and 
sell bonds carries with it the implied power to secure such 
reasonable and necessary assistance as may be requisite to 
bring about an advantageous sale, and to this end the munici- 
pality, acting in good faith, may employ a broker regularly 
engaged in the business. 11 This does not mean, however, that 
the bond house may be both the broker and the customer. 
The investment banker ordinarily buys for his own account, 
both ostensibly and in fact. If the bond house desires to act 
as a broker, disclose the name of its purchaser to the munici- 
pality, and have the award made to its customer, it can claim 
a reasonable brokerage. The difficulty is that the bond house 
is not willing to do this. There is some confusion in the deci- 
sions as to whether an agent may be employed only in an 

"Illinois v. Delafield (1840), 8 Paige (N. Y.) 526. 
B LeRoy v. Elizabeth City (N. C. 1914), 81 S. E. 1072; 166 N. C. 93. 
"Uhler v. City of Olympia (Wash. 1915), 151 Pac. 117; 87 Wash. 1. 
"Dillon, p. 1399. 



SALE AND AWARD 91 

emergency as where the bonds have been offered for sale at 
the highest permitted interest rate without finding a pur- 
chaser. It is contended, however, that an agent may be em- 
ployed when his services are reasonably required. The ques- 
tion may be raised whether the commission of an agent should 
be paid from the proceeds of the bond issue or from some 
other available funds. There is considerable difference of 
opinion on this point but the question in theory seems only 
from which pocket the payment be made. Practically, the 
statute must be consulted. 

In concluding this discussion of par sales or sales at less 
than par, it should be repeated that a sale of bonds at less 
than par, contrary to a statutory direction, does not affect the 
fundamental power of the municipality to make and issue the 
bonds; it is a mere irregularity in the exercise of its powers, 
and the validity of the bonds in the hands of innocent pur- 
chasers for value is not affected thereby. 12 

Plan of sale important to bidder and those in charge of 
sale. — The plan of sale determined upon should be carefully 
considered by the prospective bidder and the conditions upon 
which bids are canvassed should also be carefully studied by 
those in charge of the sale. The bid must be responsive to 
the advertisement. If it contains matter not properly respon- 
sive to the advertisement, it is usually a qualified bid and may 
be thrown out by the officials in charge of the sale. 

Illustrations of notices of sale. — Illustrations of notices 
of sale in New York and New Jersey and the corresponding 
forms of bids follow this chapter. 

"Dillon, p. 1401. 



92 MUNICIPAL BONDS 



Notice of Sale of New York Union Free School 
District Bonds 

NOTICE OF SALE 

$245,000 SCHOOL BONDS 

UNION FREE SCHOOL DISTRICT NO. 8 

OF THE TOWN OF ORANGETOWN, NEW YORK 

Sealed proposals will be received by The Board of Education of Union 
Free School District No. 8 of the Town of Orangetown, of the County of 
Rockland, New York, on October 4, 1921, at 8 P.M. o'clock at the Schoolhouse, 
Pearl River, New York, for the purchase of $245,000 School Bonds of said 
Board. Said bonds will be of the denomination of $500 each, will be dated 
November 1, 1921, and will mature: 

$ 7,000 on November 1, 1922 to 1924 

8,000 on November 1, 1925 and 1926 

9,000 on November 1, 1927 and 1928 
10,000 on November 1, 1929 
11,000 on November 1, 1930 and 1931 
12,000 on November 1, 1932 
13,000 on November 1, 1933 
14,000 on November 1, 1934 
15,000 on November 1, 1935 
16,000 on November 1, 1936 
17,000 on November 1, 1937 
18,000 on November 1, 1938 to 1940 
17,000 on November 1, 1941. 

Said bonds will bear interest at the rate of six per cent (6%) per annum, 
payable semi-annually on the first days of May and November in each year. 
Both principal and interest will be payable in lawful money of the United 
States of America at First National Bank of Pearl River, Pearl River, New 
York. The bonds will be coupon bonds, with the privilege of registration as to 
both principal and interest. 

The right is reserved to reject all bids, and any bid not complying with the 
terms of this notice will be rejected. 

The bonds will not be sold for less than par and in addition to the amount 
bid the successful bidder must pay accrued interest at the rate borne by the 
bonds from the date of the bonds to the date of payment of the purchase price. 

All bidders are required to deposit a certified check payable to the order 
of said Board of Education for two per centum of the amount of bonds bid for, 
drawn upon an incorporated bank or trust company. Checks of unsuccessful 
bidders will be returned upon the award of the bonds. No interest will be 
allowed upon the amount of the check of a successful bidder and such check 
will be retained to be applied in part payment for the bonds or to secure the 
board against any loss resulting from the failure of the bidder to comply with 
the terms of his bid. 

Proposals should be addressed to James B. Moore, Clerk of the Board of 
Education, Pearl River, New York, and enclosed in a sealed envelope marked 
on the outside ''Proposal for Bonds." 



SALE AND AWARD 93 

The successful bidder will be furnished with the opinion of Messrs. 

of New York City, that the bonds are bind- 
ing and legal obligations of the board. 

The bonds will be prepared under the supervision of the United States 
Mortgage & Trust Company, which will certify as to the genuineness of the 
signatures of the officials and the seal impressed thereon. 

By order of the Board of Education. 
Dated, September 21, 1921. 

JAMES B. MOORE, 
Clerk of the Board of Education. 



Form of Proposal for Such Bonds, Pursuant to the Fore- 
going Notice of Sale 

PROPOSAL FOR BONDS 



October , 1921. 

BOARD OF EDUCATION, 

Union Free School District No. 8, 

In the Town of Orangetown, Pearl River, New York. 
Sirs: 

Subject to the provisions of the annexed notice of sale, which is made a 
part of this proposal, we offer to purchase the bonds of the issue described in 
such notice and we offer to pay therefor $ 

In addition to the amount above stated we will pay accrued interest at the 
rate borne by the bonds from the date of the bonds to the date of payment of 
the purchase price. 

We enclose herewith certified check payable to the order of the Board of 
Education of U. F. S. D. No. 8 of the Town of Orangetown, in the sum of 
$ , being 2% of the par value of the bonds bid for, which 

check is to be applied in accordance with the terms of said notice. 



Notice of Sale of Bonds of a New Jersey City 

JERSEY CITY, NEW JERSEY 

NOTICE OF SALE 

$2,275,000 GENERAL IMPROVEMENT BONDS 
$1,892,000 WATER BONDS 

Sealed proposals will be received by the Director of the Department of 
Revenue and Finance of the City of Jersey City, New Jersey, on September 7, 
1921, at 12 o'clock noon at the City Hall in said City for the purchase of the 
following issues of bonds, the amount of the issue stated in each case being 



94 MUNICIPAL BONDS 

the authorized amount of bonds and the sum required to be obtained at the sale 
of such issue: 

$2,275,000 General Improvement Bonds maturing $62,000 on September 1 
in each of the years 1922 to 1939 inclusive, and $61,000 on September 1 in each 
of the years 1940 to 1958 inclusive. 

$1,892,000 Water Bonds, maturing $49,000 on September 1 in each of the 
years 1922 to 1941 inclusive, and $48,000 on September 1 in each of the years 
1942 to 1960 inclusive. 

Said bonds will be dated September 1, 1921, will be of the denomination 
of $1000 each, will bear interest at the rate of five and one-half per centum 
{S l /2%) per annum, payable semi-annually on the first days of March and 
September in each year. Both principal and interest of said bonds will be 
payable in lawful money of the United States of America at the office of The 
Treasurer of said City. The bonds will be coupon bonds, with the privilege of 
registration as to principal only or as to both principal and interest. 

No more bonds of each issue will be sold than will produce a sum equal 
to the authorized amount of such issue and an additional sum of less than 
$1000. Unless all bids are rejected, each of said issues will be sold to the 
bidder or bidders complying with the terms of sale and offering to pay not less 
than the sum required to be obtained at the sale of such issue, and to take 
therefor the least amount of bonds, commencing with the first maturity (stated 
in a multiple of $1000) ; and if two or more bidders offer to take the same 
amount of such bonds, then to the bidder or bidders offering to pay therefor the 
highest additional price. The right is reserved to reject all bids and any bid 
not complying with the terms of this notice will be rejected. 

In addition to the amount bid the purchaser must pay accrued interest at 
the rate borne by the bonds from the date of the bonds to the date of payment 
of the purchase price. 

Any bidder may condition his bid on the award to him of two or more 
of said issues but in that case if there is a more favorable bidder for any one 
of the issues for which he bids, his bid will be rejected. 

All bidders are required to deposit a certified check payable to the order 
of The Treasurer of Jersey City, New Jersey, for two per centum of the amount 
of bonds bid for, drawn upon an incorporated bank or trust company. Checks 
of unsuccessful bidders will be returned upon the award of the bonds. No 
interest will be allowed upon the amount of the check of a successful bidder, 
and such check will be retained to be applied in part payment for the bonds or 
to secure the City against any loss resulting from the failure of the bidder to 
comply with the terms of his bid. 

Proposals should be addressed to James F. Gannon, Jr., Commissioner of 
the Department of Revenue and Finance, Jersey City, New Jersey, and en- 
closed in a sealed envelope marked on the outside "Proposals for Bonds." 

The successful bidder will be furnished with the opinion of Messrs. 

of New York City, that the bonds are bind- 
ing and legal obligations of the City. 

The bonds will be prepared under the supervision of the United States 
Mortgage & Trust Company, which will certify as to the genuineness of the 
signatures of the officials and the seal impressed thereon. 

By order of the Board of Commissioners. 

Dated, August 16, 1921 

Director of the Department of 
Revenue and Finance. 



SALE AND AWARD 95 



Form of Proposal for Such Bonds, Pursuant to the Fore- 
going Notice of Sale 

PROPOSAL FOR BONDS 

Dated, , 19 

Mr. James F. Gannon, Jr., 

Commissioner of the Department of Revenue and Finance, 
Jersey City, New Jersey. 
Sir: 

Subject to the provisions of the annexed Notice of Sale, which is made a 
part of this Proposal, we offer to purchase bonds of the issues described in such 
notice, in the principal amounts stated below, the bonds bid for being those of 
each issue first to mature: 

Of the $2,275,000 General Improvement Bonds 

We offer to purchase $ 

We offer to pay therefor $ 

Of the $1,892,000 Water Bonds 

We offer to purchase $ 

We offer to pay therefor $ 

In addition to the amounts above stated we will pay accrued interest at 
the rate borne by the bonds from the date of the bonds to the date of payment 
of the purchase price. 

This bid is conditioned on the award to us, in accord- 
ance with this bid, of all or none of the bonds bid for. 
(The bidder must 

strike out one of This bid is a separate and distinct bid for each of the 

these paragraphs.) said issues, and any one of said issues may be awarded 

to us. 

We enclose herewith certified check payable to the order of The Treasurer 
of Jersey City, New Jersey, in the sum of $ being two per centum 

(2%) of the par value of the bonds bid for which check is to be applied in 
accordance with such notice. 



Chapter XI 
DEFAULT, AND REMEDY OF BONDHOLDERS 

Default. — A very able lawyer once said to the writer that 
the real question involved in corporate and municipal financ- 
ing was, "what happens if there is a default." The careful 
investment banker as well as the investor must have the con- 
sequences of default constantly in mind. 

A default occurs when the interest on or the principal of 
a bond is not paid when due. It is of interest to note that 
default in the payment of interest on municipal bonds has no 
effect upon the maturity of the principal. Default in the pay- 
ment of interest on a corporate bond generally makes the 
principal payable immediately. This is not so in the case of 
municipal bonds. A default in the payment of one coupon, 
or interest due on a specific date, does not make the principal 
payable nor does default in the payment of one or more serial 
bonds cause the remainder of the series to become due and 
payable. 

Former cases of default. — A very large number of munici- 
palities have defaulted in the payment of their bonds and 
other obligations, but such defaults are now comparatively 
infrequent. A list of 510 cases in which municipal bond 
issues have been held illegal, and in regard to which there 
was, it is to be presumed, a default, is contained in a book 
entitled, "Municipal Bonds Held Void," published in 1911 
by Maurice B. Dean. In 249 of the cases in that list, the 
bonds were held void after they had been issued. 

It would be very difficult to prepare a complete list of 
repudiations of municipal bonds, arising from financial incom- 
petency or bad faith. A number of such defaults are referred 
to in Chamberlain, 1 Jordan 2 and Raymond. 3 In addition 
to the cases referred to by these authors, the following may 
be mentioned: 

1 Chamberlain, pp. 235, 236. 

2 Jordan, p. 83. 

3 Raymond, pp. 153, 156. 

96 



DEFAULT, AND REMEDY OF BONDHOLDERS 97 

In 1872 the debt of the City of Watertown, Wisconsin, 
was $750,000, and the assessed valuation of its property was 
a little over $1,000,000, so that it was practically impossible 
for the city to pay its debt. 4 

In the years following 1876, the City of Elizabeth made 
extensive improvements, many of which were merely aids to 
real estate speculations, assessed the cost upon property bene- 
fited, and issued bonds against the assessments. The assess- 
ments were held to be invalid, and the debt was too great to 
be paid from the proceeds of general taxes. In 1879 the debt 
of the city was so large it would have required annual taxa- 
tion at the rate of six per cent to meet the city's obligations 
for interest and current expenses. 5 It is gratifying to record 
that such indebtedness of this city has long since been adjusted 
and its bonds are now legal investments for savings banks 
and trustees in the State of New York. 

The Daily Bond Buyer of August 29, 1921, prints the 
following : 

"The City of Victor, Colorado, has been ordered by 
U. S. District Judge Robert E. Lewis of Denver to raise 
$38,000 by taxation to pay a judgment in favour of the First 
National Bank of Ithaca, N. Y. This judgment was obtained, 
it is stated, as a result of a suit brought to compel payment 
on bonds issued by the city in 1915 on which neither principal 
nor interest had been paid." 

Reasons for default. — Reasons for default are the inability 
or the unwillingness of the municipality to pay its debts. In- 
ability may follow a judgment of a court of competent juris- 
diction declaring proceedings prior to issue irregular and the 
bonds invalid, in which case no tax can be levied to pay them. 

A limited tax rate may exist, beyond which the munici- 
pality may not go, or there may have been a marked shrinkage 
in assessed valuation of taxable property. Repeating what 
has been said before as to the effect of a limited tax rate, it 
is obvious that if such a limit exists and the assessed valuation 
of taxable property remains fairly constant, a fixed amount of 
revenue will be derived each year. The municipality must 
live before its debts are paid, and in practically all jurisdic- 
tions (with the possible exception of Ohio), this is settled 
law. If there is not enough money left after the munici- 

4 Rees <v. City of Watertown (1873), 19 Wall. 107 at 110. 
6 Dillon, p. 2512. 



98 MUNICIPAL BONDS 

parity's running expenses are paid, to care for debt service, 
so much the worse for the bondholder. 

Mr. Chester B. Masslich has the following to say about 
the effect of tax limits : 

"It must be remembered that a tax limit which appears to 
be sufficient at the time of the issuance of a public security 
may presently become insufficient. Alabama has had exactly 
that experience. Assessed valuations change from year to 
year. Sometimes they change because property values have 
increased or decreased, but in many States they have changed 
by fiat of the legislature, which has established a different 
basis of taxation and a different ratio between actual values 
and assessed values. Investors are well acquainted with the 
fact that these changes have sometimes been made on a down- 
ward scale. In Kentucky, where a constitutional limitation 
of bond taxes still prevails, a school district issued a com- 
paratively small amount of bonds when its assessed valuation 
was about $1,500,000. Long before those bonds fell due, it 
became unprofitable further to develop the natural resources 
that had given the district its prosperity, and the assessed 
valuation fell to about $375,000. The 50-cent tax rate 
allowed by the State constitution would no longer produce 
the amount necessary to pay the interest and provide for a 
sinking fund, and the bondholders were compelled to com- 
promise. Many such illustrations can be given in many States. 
In one prosperous Alabama city, where no question was 
raised as to the legality of any bonds it had issued, the 
authorities were able to effect a compromise which gave the 
bondholders new bonds at half the face value of the outstand- 
ing bonds and at only 3 per cent interest. Only one bond issue 
of that city escaped the general disaster, through the fact that 
it constituted a lien upon public property, and the bondholders 
took possession of that property under order of the United 
States courts. * * * 

"There are communities in the United States, which, 
abhorring the very thought of repudiation, have nevertheless 
been compelled to repudiate and compromise because the 
maximum limits of taxes they were permitted to levy have 
not been sufficient to meet their debts. One of the greatest 
American cities suffered this dishonour, but rose in its might 
and demanded and obtained a constitutional amendment for 
itself alone, empowering it to levy sufficient taxes to pay its 



DEFAULT, AND REMEDY OF BONDHOLDERS 99 

creditors. It was many years, however, before it could out- 
live the effects of that dishonour. The laws permitting invest- 
ment of funds of savings banks in New York and the various 
New England States, make it a condition of such investments 
that no default shall have occurred within a given long period. 
Investors remember these defaults. They are sensible of the 
reasons why the defaults occurred and they are not anxious 
again to put themselves into a position which makes the pay- 
ment of their bonds dependent upon the continued prosperity 
of the city or county which issued them." 6 

Shrinkage of assessed valuation is by no means unknown. 
The fiscal history of the mining towns of the Rocky Mountain 
region is familiar to most students of municipal finance. Rep- 
resentatives of St. Michel de Laval, Quebec, reported to the 
proper provincial authority that the assessed valuation of the 
taxable property had shrunk in a few years from nearly 
$9,000,000 to a little over $2,000,000, and that the munici- 
pality had a debt of $2,500,000. 

Bad faith. — Unwillingness to pay may result from various 
causes. Pomeroy, Ohio, in 1910, defaulted on its largest 
issue of refunding 6s. The reason ascribed was, that the 
bonds were not callable; but the village fathers felt they 
would like to retire the bonds, and took this means of accom- 
plishing their purpose. 7 Unwillingness to pay almost invar- 
iably involves bad faith. In the cases where the proceeds of 
the bond issue have never been received by the municipality, 
but remain in the pockets of unscrupulous promoters or de- 
faulting officials, it is difficult not to have some sympathy with 
the taxpayer. 

To sum up, a recent writer, discussing defenses to actions 
brought to enforce the payment of municipal bonds, has the 
following to say: 

"Absence of legal authority for the issuance of such obli- 
gations at the time of their issuance is always available, as a 
defense, except in case of legislative ratification; but there can 
be no such ratification if any constitutional provision would 
be thereby violated. Fraud or other official misconduct or 
delinquency in the issuance of the bonds, under an existing 
legal authority, or an excessive issue, or misapplication of the 

6 The Daily Bond Buyer, December 5, 1921, quoting from an article by 
Mr. Masslich in Good Roads. 

7 Chamberlain, p. 235. 



100 MUNICIPAL BONDS 

bonds, or of their proceeds to an illegal or unauthorized pur- 
pose, or improper execution of the bonds, or other irregulari- 
ties or omissions in the statutory requirements, may or may 
not be available as defenses, depending upon the facts and 
circumstances of the cases as they arise." 8 

The remedy of the bondholder. — Under the title, "Set- 
tling a Default in the Pioneer Days," a financial newspaper 
prints the following: 

"Defaults of some western municipalities recall former 
difficulties that have been experienced in the history of Ca- 
nadian municipal finance. Perhaps the most dramatic settle- 
ment between a group of bondholders and a defaulting mu- 
nicipality was arranged about thirty years ago between Port- 
age la Prairie and an agent who was sent out to interview 
the city when it failed to meet its interest payments. 

"When the agent arrived, a meeting of the townspeople 
was called. He asked them what they intended to do about 
paying their debts. The mayor of the town replied that the 
civic treasury was empty and the debts could not be paid at 
the moment. 

" 'If you do not meet your debenture payments at once, 
you will get a sheriff's order to seize every building in town,' 
was the ultimatum of the financial man. 

"The mayor and the leading townspeople held a hurried 
consultation. The mayor announced to the agent: 'Go to 
it, old boy. Get your sheriff's order. But we warn you 
that before you have had time to put it into execution we 
will organize the biggest moving bee that has ever been seen 
on the prairies. We'll drag every building in town over to 
the next townsite, change the name of the town, and let you 
have what's left.' 

"A settlement was hastily arranged, the town's debts being 
consolidated and extended over a term of years. That was 
civic finance in the early days of the wild West." 9 

In ascertaining the rights and remedies of municipal 
creditors, special reference must always be had to the legis- 
lation pursuant to which the debts were created. If the leg- 
islature authorizes the creation of a debt and provides no 
special mode for its payment, it is a sound proposition that 
it was intended that it should be paid in the usual way in 

8 Harris, "The Law Governing Municipal Bonds," p. 279. 

9 The Daily Bond Buyer, June 4, 1921. 



DEFAULT, AND REMEDY OF BONDHOLDERS 101 

which such debts are paid, viz., by the levy and collection of 
a tax for that purpose, if there is nothing to rebut such 
intention. 10 

We have seen that the powers of municipalities are de- 
rived from statutes and that such statutes must be carefully 
construed. Hence, it is necessary when we consider the 
enforcement of a municipality's contract liability, to pay care- 
ful attention to the legislation authorizing it, and especially 
to legislation intended to provide means to meet the obliga- 
tion. It must also be remembered that the right to issue 
bonds is not the normal means of raising money. The normal 
method is the levying and collection of taxes. 

Bonds are not liens. Seldom does a city bond have a 
prior lien upon, nor is it secured by any definite property. 
Statements on the part of over-enthusiastic bond salesmen to 
the effect that city bonds are secured by a prior lien upon all 
the property of the city, are far from the truth. In no part 
of the country except New England does possible default in 
payment even suggest the attachment of property. Munici- 
pal bonds are rarely secured by a mortgage of specific prop- 
erty; no instance of such security for eastern municipal bonds 
occurs to the writer. 

Creditors must be paid from the proceeds of taxes. If 
municipal officials will not or cannot levy taxes in sufficient 
amount to pay the creditors of the municipality, the aid of the 
courts must be sought. The proper proceeding by the credi- 
tor is to apply to the court having jurisdiction, usually a 
Federal court, for a writ of mandamus, addressed to the mu- 
nicipal authorities, directing them to levy and collect a suf- 
ficient tax to pay the claim. A writ of mandamus is in sub- 
stance an order or direction of the court to compel the per- 
formance of ministerial functions by officials who have no 
discretion to refuse to act in the manner directed. The courts 
will not direct that such a writ be issued if there is a plain 
and complete remedy by the ordinary process of the law, and 
it has, therefore, been generally held that if the creditor 
brings suit against the corporation, and obtains a judgment 
for a sum of money, the writ of mandamus will not be issued 
to compel payment. This holds true only when there is some 
other way of enforcing and rendering the judgment effectual. 11 

10 Dillon, p. 2688. 
"Dillon, p. 2677. 



• 



102 MUNICIPAL BONDS 

Judgments must be obtained. — Ordinarily, the municipal 
creditor must obtain a judgment which conclusively establishes 
the amount due him. 12 This is the practice in the Federal 
courts. When the sheriff or corresponding proper officer 
says that there is no property which he can attach or secure 
to satisfy the judgment, then a writ of mandamus may be 
issued. There is no necessity for obtaining a prior judgment 
if the bondholder, according to the statute, is expressly en- 
titled to a levy of a special tax to pay his bond. If the 
duty of levying it has been neglected or refused, it is not nec- 
essary that an execution should in such case be secured and 
returned unsatisfied, in order to entitle the judgment creditor 
to a writ of mandamus. 13 When the claim is reduced to judg- 
ment, the duty to provide for its payment becomes perfect, 
and if the claim can be paid in no other way, it must be met 
by the levy and collection of a sufficient tax for that purpose. 
As has been said, this duty will be enforced by the courts. 14 
If the order of the court is not obeyed, the delinquent officials 
may be, and in many cases have been, committed to jail for 
contempt of court. 

Effect of limited tax rate. — The courts will not enlarge the 
statutory powers of the municipal officials to levy taxes. If 
there be a limited tax rate the municipal officials may be 
ordered to tax the limit permitted by law, but may not be 
ordered to exceed it. This is true where the limit applies 
to a special or particular tax for the payment of the bonds, 
or where it applies to all municipal levies to provide funds 
for the running expenses and debt service of the municipality. 
The courts will not legislate for the bondholder. 

Contracts with the bondholder. — The statutes authoriz- 
ing the issue and the levy of taxes for the payment of bonds 
are parts of the contract between the municipality and its 
bondholders. Hence the courts will grant writs of mandamus 
to compel the levy of taxes to the full limit in force when the 
debt was created, although a subsequent constitutional restric- 
tion on the amount of taxes which may be levied has become 
operative. 15 The Federal Constitution prohibits impairment 
of contracts. 



12 Dillon, p. 2690. 

13 Dillon, p. 2691. 

14 Dillon, p. 2679. 

15 Dillon, p. 2685, note. 



DEFAULT, AND REMEDY OF BONDHOLDERS 103 

Actions based upon the contract evidenced by the bond 
may in some cases be brought by the bondholders. A munici- 
pal corporation may be sued if it fails to perform its con- 
tracts, upon a contract within the scope of the powers of the 
corporation and duly entered into by the proper officers as 
agents. Municipal corporations are liable in the same man- 
ner and to the same extent as private corporations or natural 
persons. They are not liable on contracts beyond their 
powers or bound by contracts by unauthorized officers or 
agents. 16 

Municipal corporations are likewise liable to actions on 
implied contract. So a bona fide purchaser of a city's bonds, 
which are apparently valid but which are wholly void may, 
it has been held by the courts, recover the money paid for 
the bonds. The cases on the implied liability of municipal 
corporations "run on nice lines of distinction" and turn on the 
constitutional and statutory provisions involved and the 
facts. 17 It is not possible to generalize, and it must be re- 
membered that even though a judgment be recovered, the 
judgment must be paid from the proceeds of taxation. If 
the power to tax is limited, a judgment may be uncollectable. 

The question is sometimes asked whether receivers can 
be appointed in the case of defaulting municipal corpora- 
tions. They cannot be. The appointment of the receiver is 
an equitable remedy, and equitable remedies are given by the 
court only when the legal remedy is inadequate. As has been 
pointed out, the remedy of the bondholder in case .of default 
is to obtain a judgment and obtain an order of the court, 
called a writ of mandamus } directing the proper officials to 
levy a sufficient tax to pay the bond. If a sufficient tax cannot 
be levied because of limitations, the bondholder is out of 
luck. The operation to enforce the order of the court direct- 
ing municipal officials to collect sufficient taxes does not need 
the aid of a receiver. Furthermore,, municipal bonds are not 
liens upon municipal properties, that is, the public buildings, 
water and sewer systems, parks and lands owned by the issu- 
ing political unit. Hence the income from such properties 
cannot be applied to debt service except to the extent that 
the income may, pursuant to proper statutory authority, be 
pledged in advance to the payment of the bonds. The author 

"Dillon, pp. 2810-11. 

17 Dillon, pp. 2823-24 and note. 



104 MUNICIPAL BONDS 

knows of no case in this country where a receiver has been 
appointed, although applications have been made in a few 
instances for the appointment of a receiver. It is probably 
true that in Canada it is possible under existing legislation 
for the provincial authorities to step in and administer the 
affairs of a defaulting municipality, but this is only because 
of the statute authorizing such procedure. Admirable as this 
provision may be, the idea of such direct intervention is not 
in accord with American ideas of municipal and State 
government. 

Legislative relief. — Legislative relief is sometimes ac- 
corded the bondholder, but the claim and the debt may not 
be such as the law recognizes as a legal obligation. It is 
possible for the legislature to compel municipal corporations 
to recognize debts or claims, not binding in strict law, which 
for technical reasons cannot be otherwise enforced, but which 
nevertheless are just and equitable in their character, and 
involve a moral obligation. 18 Constitutional limitations, 
whether they be limitations on the tax rate or the amount of 
debt to be incurred, cannot be brushed aside by legislatures, 
and if such restrictions prevent payment, legislatures are 
powerless to afford relief. 

But when all is said and done, there can be no further 
assurance of good faith given investors in municipal bonds 
than the simple statement that no American municipality of 
any importance has defaulted in recent years on the principal 
or interest of any of its obligations. 19 

"Dillon, p. 222. 

19 Chamberlain, p. 23. 



Chapter XII 
BONDS AS INVESTMENTS 

Definition. — To make an investment, implies divesting 
one's self of the possession and control of one's assets and 
granting such possession and control to another. Stated in 
more specific language, we mean that when we make an in- 
vestment, we take our money and turn it over to somebody 
else in return for a promise to repay the money loaned and 
to pay interest for the use of the money so paid over. The 
word "loan" is the practical equivalent. 

In common parlance, a purchase of stock is called an in- 
vestment, but it is not really an investment because there is no 
promise that the money used will be returned at a stated time. 
A person who buys stock and becomes a stockholder becomes 
a joint adventurer; he is not a creditor. A partner in a busi- 
ness concern may contribute a part of the capital employed in 
the business, and he is not, under ordinary conditions, a 
creditor. His right to withdraw his contribution is, there- 
fore, always subject to the prior right of other creditors who 
have extended credit to the partnership. Consequently, in 
the sense in which we are using the term, a partner is not an 
investor. 

On the other hand, a purchaser of securities which are 
ordinarily regarded as the proper media for investment, may 
be a speculator. Such a purchaser takes the interest earned 
as an incident, but expects that his profit will come from a 
rise in value of the security. Speculation and investment are 
actuated by the same motive : desire for gain, and the dif- 
ference between them is the difference in degree of risk the 
individual is willing to assume. It is ordinarily true that the 
greater the return upon an amount invested or adventured, 
the greater possibility there is that the principal may be lost. 
Conversely, the greater the certainty is that the principal will 
be returned, in accord with the promise, the smaller the return 
will be. 

105 



106 MUNICIPAL BONDS 

The ideal investment. — An ideal investment is described 
by Chamberlain 1 as follows : "If an investor has obtained 
(1) security for his principal, (2) a fixed or definite interest, 
(3) a fair return in income, and (4) an investment which is 
salable without difficulty, and (5) is acceptable as collateral, 
and (6) is free from direct tax, and (7) requires almost no 
care, and (8) matures after a satisfactory lapse of time, and 
(9) is in convenient units of denomination, and (10) has as 
good a chance of appreciating as of depreciating as its quali- 
ties become more generally recognized, — that man is to be 
felicitated." 

This author also says: "that any investment which will 
measure up to the standard of these qualities mentioned is 
well-nigh ideal." 

Municipal bonds as ideal investment. — Municipal bonds 
possess all of the characteristics of a good investment, except 
the possible factor of appreciation in value as maturity is 
approached. A bond purchased at a discount from par will 
appreciate in value as maturity approaches, but a premium 
bond depreciates, although market conditions may increase its 
value for a period. 

Applying the tests of a good investment to municipal 
bonds and at the same time defining our terms we find: 

Security of principal. — This means that, within the bounds 
of reason, the principal will be returned to the lender at the 
time agreed upon or that it can be converted at will or at a 
fixed time into some equivalent form of wealth, equal in value 
and equally satisfactory to the lender. Municipal bonds are 
due and payable at an agreed time, and although as we have 
seen, there have been municipal defaults (and the possibility 
of such default ought always to be in the mind of the invest- 
ment banker and the bond buyer), the percentage of such 
defaults is very low indeed. 

Stability of income. — The municipal bond bears interest 
at a fixed rate per cent ordinarily payable semi-annually. The 
amount received on each of the semi-annual interest dates is 
the same and is not subject to abatement or fluctuation. It 
is paid at regular intervals in predetermined amounts. The 
interest on municipal bonds is ordinarily paid promptly, for 
municipal credit depends to a large extent upon promptness. 
A coupon, when detached and cancelled, is a promise, inde- 

1 Chamberlain, pp. 27-28. 



BONDS AS INVESTMENTS 107 

pendent of the promise of the bond, to pay the amount of 
money called for. 

Fair income return. — The question as to what constitutes 
a fair return on the income invested, depends upon many 
factors. All other things being equal, the income return 
varies inversely as the security. When the factor of safety 
is considered, the income return on the average municipal 
bond (which may be greater or less than the coupon or stated 
interest rate) will be found to be in very close accord with the 
market value of money. 

Marketability. — By this we mean salability without loss of 
time hunting for a purchaser. We mean something which has 
a ready market; which can be quickly sold and converted into 
money. The Koh-i-noor and the Cullinan diamonds possess 
great value, but neither stone is marketable because of its 
enormous value and the limited number of people who could 
afford to buy it. To be marketable, then, the selling price of 
a commodity must be such as not to be prohibitive, and the 
demand must be more or less constant. It is a fact that 
municipal bonds possess a very high degree of marketability. 
Tax exemption. — In the last analysis, all wealth is taxed, 
and it is a question only of the directness of its imposition : of 
the incidence of taxation, as the economists say. But the 
incidence of taxation is so unequal that one may often profit 
by knowledge of the working of this unequality, or at least 
he may secure his investment from unforeseen levies by the 
provisions of his investment contract, or by taking advantage 
of the provisions of statutory law. We will consider tax 
exemption more in detail later on. It is sufficient to say at 
this point that the municipal bond is ordinarily tax-exempt in 
the State of issue, and always exempt from Federal impo- 
sitions. 

Exemption from care. — Funds on deposit are subject to 
changing rates of interest. Mortgages require attention to 
many details, such as verification of the payment of taxes and 
care that repairs are made to avoid depreciation of the mort- 
gaged property. Real estate requires constant attention, for 
the collection of rents, the making of repairs and alterations, 
and betterments for tenants. A bond which is registered as 
to principal and interest, on which the owner receives the 
interest by check at stated periods, or from which he may 
detach the coupons and cash them, requires little care. A safe 



108 MUNICIPAL BONDS 

deposit box for the registered bond, and semi-annual visits 
to it in the case of the coupon bond, represent all the care that 
is necessary for the bond if the bond has been wisely selected 
in every respect. 

Acceptable duration. — The investor, if an individual, does 
not care particularly about changing the character of his in- 
vestments, and prefers that they remain constant for periods 
of shorter or greater duration. Investments for individuals 
may be said to be for a lifetime. Where no question of depre- 
ciation of security is involved, a term of from twenty to fifty 
years is not too long, and it is generally true that investors 
prefer the longer- to the shorter-term bond. Trustees and 
executors have particular requirements which depend upon the 
terms of the trusts pursuant to which they are acting. While 
the tendency has been to shorten the term of municipal bonds, 
and while new issues of municipal bonds rarely have an aver- 
age term of more than twenty years, it is possible for any 
kind of an investor to select a bond having a term which 
meets his particular needs. 

Acceptable denomination. — Municipal bonds are ordina- 
rily of the denomination of $1,000 each, although there are 
many bonds of smaller denominations (called "baby bonds") 
offered in the market from time to time. The denomination 
of $1,000 is an easy one in which to make computations and 
is the accepted denomination in the market. 

Potential appreciation. — By this we mean possible increase 
in value of the principal. The possibilities of appreciation in 
speculation are without limit, but such appreciation is a de- 
sirable, although not a necessary, incident of a good invest- 
ment. Property secured by a mortgage is apt to depreciate 
in value unless current repairs are promptly made. Obso- 
lescence, by which is meant a change in mode of operation 
which renders changes necessary in buildings or machinery, 
may destroy the security. Obsolescence is not a factor as to 
municipal bonds, being cared for by serial payments of prin- 
cipal or the accumulation of a sinking fund. 

If the value of the bond increases, so much the better for 
the bondholder. If a bond is purchased at a discount, more 
than the purchase price is returned at maturity; hence it 
appreciates. If it is purchased at a premium, less is returned; 
hence it depreciates in value. It is therefore obvious that any 
bond, municipal or corporate, cannot much appreciate, and as 



BONDS AS INVESTMENTS 109 

its maturity date draws near, its value approaches par. For a 
more adequate treatment of this subject, the student is referred 
to the admirable discussion in Professor Jordan's work on 
''Investments," entitled "Mathematics of Investments." 

Investments by fiduciaries. — Trustees and executors of 
estates, guardians of minor children, and^committees for in- 
competent persons, are held to a very strict accountability for 
the funds entrusted to their care and management. It has 
seemed wise to the lawmakers of many States specifically to 
define the kind of investments which such fiduciaries can make. 
A reference to the statutes of all the States is not possible 
here, but the general principles may be inferred from an 
examination of the statutes of New York. While such statu- 
tory regulations are intended to secure trust funds against 
loss, it must be remembered that the test of the character of 
investment is entirely within the judgment of the legislatures 
of the various States, and their requirements may appear to 
be arbitrary, but the legislatures are the judges. 

Savings banks in New York may invest the moneys de- 
posited therein in the following securities, among others: 

(a) The stocks, bonds, interest-bearing obligations or 
revenue notes sold at a discount, of any city, county, town, 
village, school district, union free-school district or poor dis- 
trict in New York State, provided that they were issued pur- 
suant to law and that the faith and credit of the municipality 
or district that issued them is pledged for their payment. 

(b) The stocks or bonds of any incorporated city, 
county, village or town situated in one of the States which 
adjoins the State of New York, if its indebtedness together 
with the indebtedness of any district or other municipal cor- 
poration or subdivision, except the county included therein, 
less its water debt and sinking fund, is seven per cent or less 
of its assessed valuation. The bonds of counties are legal 
investments if their indebtedness less sinking funds is within 
seven per cent of the taxable property. 

(c) The stocks or bonds of any incorporated city, situ- 
ated in other of the States of the United States which were 
admitted to statehood prior to January, 1896, and which 
since January, 1861, has not defaulted, provided such city 
has a population of not less than 45,000 inhabitants, has been 
incorporated at least twenty-five years, and has not, since 
January 1, 1878, defaulted for more than ninety days in the 



110 MUNICIPAL BONDS 

payment of principal or interest of its indebtedness, or ef- 
fected any compromise with the holders thereof. If the 
indebtedness of such city has been paid, refunded or compro- 
mised, then a new period as to default begins to run. The 
limitation on indebtedness, which must include any district, 
other municipal corporation or subdivision, except a county, 
wholly or partly included therein, less its water debt and sink- 
ing funds, may not exceed seven per cent. 2 

Fiduciaries may invest in any security in which a savings 
bank may invest its funds. 3 

The New York State superintendent of banks each year 
issues a list of cities, counties, etc., the bonds of which are 
"legal investments," having made during the preceding year 
an examination of the facts upon which such list is predicated. 
The fact that the name of any particular municipality is 
omitted, does not necessarily mean its bonds are not legal, 
but may mean its financial officials have been negligent in 
supplying requested data. A list of "legals" in New York, 
Massachusetts and Connecticut follows this chapter. 

After a bond has been purchased by a bank, and for some 
reason the situation changes so that the bond ceases to meet 
the legal requirements, must the bank sell the bond? The 
Attorney General of New York has decided that a savings 
bank may be compelled to do so by the State banking super- 
intendent. 4 

It is probably true that the ordinary trustee would be 
accountable to his beneficiaries if a bond, having ceased to be 
a legal investment, should depreciate in price. 

Postal savings deposits. — Under the Postal Savings Law 
the funds received at postal savings depository offices of each 
city, town, village or other locality, must be deposited in sol- 
vent banks located therein, provided these banks qualify to 
receive deposits. One of the qualifications is the pledging by 
the banks against the deposits, of such securities as the board 
prescribes. The Board of Trustees by its regulations of 
August 16, 1916 (as amended) has prescribed the terms and 
conditions of the figures at which different classes of munici- 
pal bonds will be accepted. 

Bonds of any city or county having a population of over 

2 Cons. Laws, Chap. 2, Sec. 239. 

3 Cons. Laws, Chap. 13, Sec. Ill; Chap. 14, Sec. 85; Chap. 50, Sec. 116. 

4 Opinions of Attorney General, 1908, p. 371. 



BONDS AS INVESTMENTS 111 

30,000 are accepted at 90 per cent of their market value, but 
if such market value is above par, they will be accepted at only 
90 per cent of the par value; bonds of any city, town, borough 
or village of the United States having a population of be- 
tween 20,000 and 30,000 are accepted at 80 per cent of their 
market value, provided said market value is not in excess of 
par; while bonds of any other city, town, county or other 
legally constituted municipality or district of the United 
States, otherwise eligible, are accepted at 75 per cent of their 
market value but not to exceed 75 per cent of the par value. 
Bonds of school districts are included in this classification. 

The regulations further provide that the municipality or 
district must have been in existence for a period of ten years, 
must not have defaulted for ten years and must not have a 
net funded indebtedness exceeding 10 per cent of the valua- 
tion of its taxable property. The regulations have further 
defined "net funded indebtedness." The definition is inter- 
esting for the reason that the bonds of any civil division, 
whose territorial limits are approximately coterminus with 
the municipality or district, must be included in computing 
gross debt. Sinking funds, bonds or obligations payable from 
current revenues, and bonds issued to provide public utilities, 
if self-sustaining, assessment bonds to the extent that these 
bonds are secured by uncollected assessments, and bonds 
which are to be paid from funds given by the State, may be 
deducted in determining the net debt. To be eligible, the 
bonds must be general obligations, payable without limita- 
tion to a special fund, from the proceeds of taxes levied upon 
all the taxable, real, and personal property within the ter- 
ritorial limits of the issuing municipality or district. Revenue 
bonds, temporary bonds, temporary notes, certificates of in- 
debtedness and warrants are excluded. Provision is made 
for bonds of consolidated or merged municipalities. 5 

5 State and City Section of the Commercial and Financial Chronicle, De- 
cember 25, 1920. 



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BONDS AS INVESTMENTS 117 



REFERENCES 

Chamberlain, Lawrence: "The Principles of Bond Invest- 
ment." Third Edition, 1913, Henry Holt & Co. 

Hoffman & Wood: "Taxation of Federal, State and Munici- 
pal Bonds." Privately printed in 1921. 

Also see a very valuable "Digest of Opinions of Attorney 
General of New York State Relative to Legality of Mu- 
nicipal Bonds as Investments for Savings Banks and 
Trustees." Prepared for E. H. Rollins & Son, by Messrs. 
Hoffman and Wood, 1922. 



Chapter XIII 
TAXATION OF BONDS 

Complexity of our tax assessments. — The complexity of 
our tax assessments and the conflict of tax influence caused 
by the defaults, laws and rates of the several States, and 
their political subdivisions, and the over-shadowing influence 
of the present system of Federal taxation made necessary 
by the late war, prevent an exhaustive treatment of the sub- 
ject in a book of this character. Only an outline of general 
principles can be given here. In the application of general 
principles, simplicity is desirable. For this reason, we shall 
consider the theoretical effect of a tax upon the ordinary 
corporation bond. 

Direct personal property tax versus income tax. — The 
two generally recognized taxes in the United States affecting 
such a bond are direct personal property taxes and income 
taxes. The personal property tax is generally imposed upon 
the principal of the bond. The income tax is imposed upon 
the interest the bond bears. To realize the effect of a per- 
sonal property tax upon the principal of the bond, take the 
hypothetical case of a bond owned in a State having no per- 
sonal property tax and no income tax. If such a State were 
to pass a law imposing a one per cent tax upon the principal 
of a $1,000 bond bearing five per cent interest, the owner 
would be obliged to pay $10 in taxes each year. This would 
reduce the income on the bond from $50 to $40 a year. If 
the State, instead of enacting the personal property tax just 
stated, were to pass an income tax law taxing the interest of 
the bond at the rate of twenty per cent, the owner would be 
obliged to pay $10 in taxes each year. This would make 
exactly the same reduction in his income from the bond, 
which would then yield only $40 a year. It may be seen, 
therefore, because as a general proposition all taxes are paid 
out of income, that it is immaterial, in considering the effect 
of a tax on the bond, whether the tax is based upon its prin- 

118 



TAXATION OF BONDS 119 

cipal or income. If the owner of the bond has a capital of 
$100,000 consisting entirely of similar bonds, the effect of 
the tax in either case is a reduction of his income from $5,000 
to $4,000 a year so long as he holds the bonds and they are 
subjected to such taxes. 1 

The effect of the taxation of the income from bonds is 
shown in the table entitled "Tax Free v. Taxable Bonds," 
following this chapter. It will be observed that in the case 
of an individual whose income, subject to surtaxes, is between 
$10,000 and $12,000, he must receive 4.44 per cent net in- 
come, to be as well off as he would be with a municipal bond 
from which he receives a non-taxable income of 4 per cent 
per annum. As the amount of surtaxes increases, the discrep- 
ancy is more marked. The fortunate individual whose in- 
come exceeds $200,000 a year, must receive 9.53% to obtain 
as much income as he would obtain from a 4 per cent munici- 
pal bond. 

Definition of the taxing power. 2 — The power to tax is 
essentially incident to sovereignty. It arises out of necessity 
and is possessed by all sovereign States. Necessarily, it is 
limited to subjects within the jurisdiction of the State. Those 
subjects are persons, property, and business. Whatever form 
taxation may assume, it must relate to one of these subjects. 

Taxing power of the United States. — Power "to lay and 
collect taxes, duties, imposts and excises" is conferred upon 
Congress by Art. 1, Sec. 8 of the Constitution of the United 
States. That this power is exhaustive and embraces every 
conceivable power of taxation, has never been questioned, but 
it is also conceded that it is subject to the limits, expressed 
or implied, contained in other sections of the Federal Con- 
stitution. 

Limitations upon the Federal taxing power. — The Con- 
stitution of the United States contains three express limita- 
tions upon the power of taxation conferred upon the Federal 
Government. All duties, imposts and excises are required to 
operate uniformly throughout the United States. Taxes or 
duties on articles exported from any State are prohibited, and 
capitation and other direct taxes, except income taxes, are 

1 Annals, p. 156. 

3 Much of the following material is derived from "Taxation of Federal, 
State and Municipal Bonds" by Messrs. Hoffman and Wood, to which the stu- 
dent is referred for a more complete treatment of the subject. 



120 MUNICIPAL BONDS 

also prohibited, unless levied in proportion to the census or 
enumeration directed by the Constitution to be taken. Many- 
limits upon this power are also implied from the nature of 
our federal form of government and from other express 
limits imposed upon the Federal Government by the Con- 
stitution. 

Taxing power of the States. — The States composing the 
United States are sovereign States, and the power of taxa- 
tion is, therefore, inherent in each State. 

Unless restrained by the provisions of the State or Fed- 
eral Constitution, the power of a State as to the mode, form 
and extent of taxation is unlimited, where the subjects to 
which it applies are within its jurisdiction. The legislature 
levying the tax is the sole and ultimate judge of the expedi- 
ency or necessity of requiring it and of the extent to which it 
shall be charged upon any class of taxable subjects. Hence, 
in the absence of constitutional limitation, the legislature may 
select the subjects of taxation and upon those subjects only, 
may the taxing officials of the State extend the tax. Subjects 
not selected for taxation by the legislature are commonly 
designated as "exempt from taxation." 

Limitations upon the taxing power of the States. — Many 
limitations are imposed upon the taxing power of the States 
by the Constitution of the United States. By the fourteenth 
amendment, the States are prohibited from depriving citizens 
of property without due process of law, and this amendment 
has been construed as prohibiting the levy of taxes except for 
public purposes. It is also well settled that a State cannot 
tax bonds of the United States or its Territories without the 
consent of the Congress. 

Purposes for which taxes may be levied. — The power of 
taxation, moreover, can be exercised only for public purposes. 
In the leading case upon this subject, Mr. Justice Miller said, 
"To lay with one hand the power of the government on the 
property of the citizen, and with the other bestow it upon 
favoured individuals to aid private enterprise and build up 
private fortunes, is none the less a robbery because it is done 
under the forms of law and is called taxation. This is not 
legislation. It is a decree under legislative forms. Nor is it 
taxation." 3 

3 Loan Association v. Topeka (1874), 20 Wall (U. S.) 655 at 664. 



TAXATION OF BONDS 121 

Taxation of the principal of State and municipal bonds by 
the United States. — As the power to tax is the power to de- 
stroy, to admit the power of the Federal Government to tax 
the States, or their instrumentalities of government, would 
completely subordinate the States to the Federal Government. 
It is, therefore, well established that it is not within the 
power of the United States to tax a State or its governmental 
instrumentalities, and, as to tax a bond issued by a State or 
one of its subdivisions is to tax a governmental function, it 
is well established that the power to tax such obligations is 
not vested in the United States. 

Taxation of the principal of State and municipal bonds 
by the States. — While a State may exempt State or munici- 
pal bonds from taxation, unless prohibited by its constitution 
from doing so, it may refuse to grant such an exemption. It 
is well settled that, in the absence of constitutional limita- 
tions, the power of taxation extends to and embraces the 
bonds of the State and its municipalities. 

In levying a tax upon such bonds, however, the State may 
not impair the obligation of the contract with the holders of 
the bonds and the coupons representing the interest thereon. 

The bonds of other States or of the municipalities of 
other States may be taxed if located within the limits of the 
State levying the tax, or owned by residents of that State. 
Statutes levying such taxes do not violate the Federal Con- 
stitution, as the several States, in ratifying that instrument, 
did not enter into a covenant preventing one State from tax- 
ing the public securities issued by another State, her counties, 
or municipalities. The State may also authorize its political 
subdivisions to tax public securities, including the bonds of the 
subdivision levying the tax, but only when the security itself 
or its owner is within the jurisdiction of the State. 

Taxation of the income from State and municipal bonds : 
nature of the tax. — The Federal Government and many of 
the States have enacted statutes taxing income. While many 
of these statutes were passed pursuant to express constitu- 
tional provisions authorizing the enactment of such laws, the 
power of the legislature to tax incomes does not depend upon 
a constitutional grant. The power of taxation is plenary 
and includes all methods of taxation. 

Such taxes are not property taxes within the meaning of 
constitutional provisions requiring taxation of property to be 



122 MUNICIPAL BONDS 

equal and uniform, and accordingly, graduated taxes have 
been uniformly sustained as constitutional. Nor are such 
taxes to be considered as direct personal taxes or privilege 
taxes. 

Non-residents, therefore, may be subjected to such taxa- 
tion based upon the income earned in the State or received 
from residents of the State without violating the Federal 
Constitution, and a State may tax income derived from bonds 
owned by a non-resident, if the bonds are located in the State, 
but not otherwise. Not being personal taxes, the State levy- 
ing the tax need not have jurisdiction over the person entitled 
to the income taxed. The fact that the property from which 
the income is derived is also taxed, does not render a tax upon 
such income void for double taxation, the income being re- 
garded as a distinct subject of taxation. In most States there 
is no legal obstacle to double taxation. 

Taxation of income of State and municipal bonds by the 
United States. — As the Constitution read prior to the adoption 
of the sixteenth amendment, the Federal Government had no 
power to levy income taxes unless apportioned between the 
States. This was decided in the Pollock case. 4 Thereafter 
the sixteenth amendment to the Constitution was adopted and 
became effective February 25, 1913. This provides as fol- 
lows: "The Congress shall have power to lay and collect 
taxes on incomes from whatever source derived, without 
apportionment among the several States, and without regard 
to any census or enumeration." 

Effect of the sixteenth amendment to the Federal Consti- 
tution. — Since the adoption of this amendment, the question has 
arisen whether the taxing power of the United States has 
been extended, through its adoption, so as to permit of the 
taxation by the Congress of the income derived from bonds 
of the various States, and of the subdivisions thereof. Some 
diversity of opinion appears to exist among eminent authori- 
ties, and so far the question has not been directly passed upon 
by the United States Supreme Court. It is the general opin- 
ion that no additional powers of taxation have been devolved 
upon the Congress by virtue of the sixteenth amendment, or 
to state it differently, that property or the income from 
property which could not be taxed prior to the adoption of 
the sixteenth amendment, cannot now be taxed unless the tax 

4 Pollock v. The Farmers' Loan and Trust Co. (1895), 157 U. S. 429. 



TAXATION OF BONDS 123 

is apportioned between the States. The writer, however, 
strongly dissents from this view. The words "from what- 
ever source derived" must be construed in accordance with 
the ordinary rules of statutory construction; they must be 
given effect irrespective of the thoughts in the minds of the 
originators of the phrase, or in the minds of the advocates 
or opponents of the amendment. If the words are to be 
given their ordinary meaning in the English language, it 
would seem there can be no .doubt that additional power to 
tax has been granted to the Congress. It is contended, there- 
fore, that although the Congress has not as yet attempted 
to tax the interest on municipal bonds, it has the power to 
levy such a tax under the provisions of the sixteenth consti- 
tutional amendment. 

Taxation of income of State and municipal bonds by the 
States. — Income from State and municipal bonds is taxable 
by the State of issue when such bonds are owned by its citizens. 
Can the State, however, levy such a tax upon the income de- 
rived from a bond which it has contracted to exempt from 
taxation? The right of the State to tax the income of such 
bonds does not appear ever to have been decided. On prin- 
ciple, however, it would seem that it is not within the power 
of a State to tax such income. It is well established that a 
tax upon the income of a bond is a tax upon the security. It 
is for this reason that a State cannot tax the interest of bonds 
of the Federal Government. It would seem to be no less a 
tax upon the' security when it is levied by a State upon the 
income of a State or municipal bond. If the bond is exempt 
from taxation by a contract, protected by the Federal Con- 
stitution, in what respect does the taxation of the income 
derived from such a bond differ from the taxation of the 
income of bonds of the United States? 

When a bond is issued under such circumstances that a 
contract for an exemption from taxation arises, or when for 
a valuable consideration the State has contracted to exempt 
a bond from future taxation, the State may not violate such 
contract by taxing the bond under the guise of taxing the 
income derived therefrom. 

When, however, the exemption from taxation is not a 
contract right, it may be withdrawn at any time by the State, 
Under such circumstances, there seems to be no reason why 
the State may not tax the income of the bond. If it might 



124 MUNICIPAL BONDS 

withdraw entirely the exemption, it clearly can withdraw it 
to the extent of subjecting to taxation the income derived 
from the bond. 

Taxation of bonds of non-residents. — As to the taxation 
of public securities belonging to non-residents, it is well settled 
that such securities are in such concrete, tangible form that 
they are subject to taxation where found irrespective of the 
domicile of the owner and a State may declare that, if found 
within its limits, they shall be subject to taxation. The 
statutes of most States accordingly provide for the taxation 
of such securities in the hands of non-residents either ex- 
pressly or by providing that all personal property within the 
State shall be subject to taxation. 

Situs for taxation. — The physical presence of the bond 
within the limits of the State is essential to give the State 
jurisdiction to tax it, when owned by a non-resident. The 
power of taxation is confined to the territorial limits of the 
State and it is not within the power of a State to tax bonds 
owned by a non-resident unless it has acquired jurisdiction 
over the bonds by reason of their presence in the State. An 
attempt to tax property not within the jurisdiction of the 
State violates the Constitution of the United States by de- 
priving the owner thereof of property without due process 
of law. 

Mere temporary presence of property within the limits 
of the State is not sufficient to confer jurisdiction. There- 
fore, a bond sent into a State for collection, registration, sale 
or exchange, etc., by a non-resident, is not subject to taxation 
by that State. 

Inheritance taxes. — An inheritance, succession, or dece- 
dent's estate tax, so called, is a tax on the succession and not 
on the property itself. The right to take property by devise 
or descent is the creature of the law and the authority which 
confers the right may impose conditions upon it. 

The States and the United States may tax the privilege, 
discriminate between relatives and between these and stran- 
gers, and grant exemptions. As the tax is not levied upon 
the property which passes to the heir or devisee, but upon the 
right to take the property by will or descent, the character of 
the property passing is immaterial. Hence, limitations upon 
the right of the Federal Government to tax the instrumen- 
talities of the States, or vice versa, do not apply to inheri- 



TAXATION OF BONDS US 

tance taxes. The State or Federal Government may lawfully 
measure the amount of tax by referring to the value of the 
property passing. The incidental fact that such property is 
composed, in whole or in part, of Federal or municipal bonds 
does not affect the validity of the tax. 

In considering taxation and its effect, it must be remem- 
bered that the purpose of taxation is to raise money for the 
necessities of government, whether national, federal or 
municipal. Taxing acts are not always fair or equitable, and 
they are not necessarily intended to be. Government cannot 
exist without the means to carry it on, and the following 
quotation from Bernard Shaw's Casar and Cleopatra, illus- 
trates the point: 

Rufio (bluntly). You must pay, Pothinus. Why words? You are get- 
ting off cheaply enough. 

Pothinus (bitterly). Is it possible that Cassar, the conqueror of the world, 
has time to occupy himself with such a trifle as our taxes? 

Casar. My friend: taxes are the chief business of a conqueror of the 
world. 



126 MUNICIPAL BONDS 

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TAXATION OF BONDS 



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Chapter XIV 
VALUATION OF BONDS 

There is no golden rule for the valuation or appraisal of 
bonds, whether municipal or other. The much overworked 
word "relativity" may be used in describing the mental and 
mathematical processes involved in determining purchasing 
and selling price, but the word should be "paid extra." As 
Humpty Dumpty says to Alice in "Through the Looking- 
Glass" : "When I make a word do a lot of work like that, I 
always pay it extra." 

Money a commodity. — Money is a commodity, and its 
price, or the price of its use, fluctuates in tides and is, except 
when prices are "pegged" during a national emergency, 
governed by the laws of supply and demand. The buyer of 
a bond holds a written promise to pay a specified sum of 
money to the owner of the bond on a specified date. The 
maker of the bond, whether individual or corporate, promises 
to pay interest for the use of the money. In ordinary terms, 
the bondholder makes a loan and is paid for making it. How 
much he is paid is governed by many factors, summed up 
in the words "market conditions" existing at the time the 
loan is made. 

Interest. — Interest is the amount paid, at annual, semi-an- 
nual, or quarterly periods for the use of money. It is meas- 
ured by a percentage of the sum borrowed and in modern 
times such percentage has been from two to eight per cent 
or more. Gorgeous rates of interest, such as ten per cent a 
month or one hundred and twenty per cent a year, have passed 
with the happy frontier days of the Golden West when prop- 
erty was as insecure as life. 

Nominal yield. — Disregarding theories of present value, 
and compounding interest return, the sum of money actually 
paid for the use of $1,000 at five per cent for twenty years 
is $1,000, which is the nominal yield, and the net yield, if the 
bond is purchased at par. 

128 



VALUATION OF BONDS 129 

Net yield. — Bonds are rarely purchased or sold at par, but 
"at a premium" which is above par, or "at a discount" which 
is below par. Now it is evident that a bond purchased at a 
discount gradually appreciates in value as it approaches ma- 
turity, and a bond purchased at a premium depreciates for 
the same reason. The amount received as interest is not the 
true income if the principal either appreciates or depreciates. 
In such cases, the real income is determined by the actual 
income, reduced by the amount of depreciation of principal, 
or increased by the amount of appreciation. For a further 
discussion of both depreciation and appreciation, the reader 
will do well to consult "Jordan on Investments." 1 

Tables of bond values. — These are used to determine net 
yield, when price, face value, and date of maturity are known, 
and to ascertain the price at which a bond of known face 
value and maturity must be purchased to yield a certain 
desired return. The mathematical and accounting theories 
upon which the soundness of such tables depends are highly 
interesting, but neither a statement nor a discussion of such 
theories has any place here. The student is referred to 
Jordan, 2 Rollins, 3 Chamberlain, 4 and other writers. The 
point for the reader to observe is that by the use of such 
tables, we can determine the basis or net yield upon which 
bonds sell, and the basis, so determined, measures the value 
of the investment. If the basis or net yield is 5.40, the 
investor has a cheaper bond than he has if the basis is 3.10. 
The expression "net income basis" is frequently used for and 
is more accurate than either "basis" or "net yield." 

Fluctuations in the net income basis are shown in the 
chart following this chapter. By reference to it, the rise and 
fall of prices since 1900 may be studied, and it will be ob- 
served that bonds were highest in 1901, the basis being 3.10 
and lowest in September, 1920, the basis being 5.25. The 
sudden and unexpected rise is noteworthy, beginning in July, 
1921, and temporarily suspended in December, 1921. 

The prices obtained twenty years ago by an investment 
banking house are shown in the copy of an advertisement of 
Messrs. Harris Forbes & Company, taken from the New 

1 Jordan, p. 276. 
8 p. 274. 

3 Annals, p. 12. 

4 pp. 405 and 426. 



130 MUNICIPAL BONDS 

York Sun of November 1, 1921, following this chapter. The 
"net returns" may be compared with the "yield per cent" of 
various issues during the weeks ending December 16 and 
December 30, 1921, shown in the tables taken from the New 
York Times of December 17 and December 31, 1921. 

The income basis on which New York City bonds have 
sold from 1907 to 1921 is shown in the schedule "Results 
of New York City Bond Sales" abbreviated from a table pub- 
lished in the Bond Buyer on December 16, 1921, following 1 
this chapter. 

Differences in yield between different maturities of the 
same issue of bonds, sold at a discount, at par and at a pre- 
mium, are shown in the advertisement of $31,800,000 State 
of New York 5s, offered June 10, 1921, a copy of which 
follows this chapter. The earlier maturities offered at a dis- 
count yield more than the coupon rate of interest. The bonds 
maturing in the year 1931 and thereafter, offered at increas- 
ing premiums as the term lengthens, yield less than the coupon 
rate of interest or slightly more than 4.70. 

Purchasing power of the dollar. — It must not be over- 
looked that the purchasing power of money varies from time 
to time, and tends to increase or to decrease over long 
periods. The rise in the cost of living during the World War 
and thereafter is fresh in our recollection. The gradual, too 
gradual, decline is hailed with delight. If it cost $5,000 a 
year to live in 1910 and costs $10,000 a year in the year of 
Grace 1922, the yield of interest at six per cent purchases 
only what the yield at three per cent would buy a decade ago. 
A chart showing wholesale prices in the United States for 
110 years, reproduced with the permission of Col. Leonard 
P. Ayers (Vice president of The Cleveland Trust Company), 
from "Price Changes and Business Prospects" follows this 
chapter. The price chart shows mountainous peaks during 
and after the War of 1812, the Civil War and the World 
War. In each case, prices rose to far more than twice the 
normal. After the first two wars, prices declined precipi- 
tously for about five years and then more slowly for 25 or 30 
years. We may reasonably infer that prices will continue to 
decline for several years. 

Market conditions. — Market conditons are a resultant of 
causes and events, some extending over a period of years, 
such as gradually rising commodity prices, and some immedi- 



VALUATION OF BONDS 131 

ate, such as panics. The general industrial condition of the 
country (calling or not calling for new money) depends upon 
numerous important factors. In substance, it is the demand 
for money which determines its price and this price is 
interest. 

The value of a bond has been said to be the capitalized 
value, at the current interest rate paid for short-time money, 
of the amount of its yield. If the current interest rate rises 
very sharply, and the high rate is believed to be only tem- 
porary, the price of bonds will not be materially affected. 
Stated differently, it is said that the price of bonds varies 
inversely with the rate of interest paid for short-time money. 5 

Bonds are not equally valuable. — In the preceding chap- 
ter, the elements of a sound investment were discussed, and 
in other chapters differences were shown between the powers 
of municipalities or quasi-municipalities and between unquali- 
fied and qualified promises to pay. There must be a difference 
in value between a $1,000 water bond of New York City and 
the bond of an irrigation or drainage district, although they 
bear the same interest rate and have the same term. One is 
the unqualified promise of the country's largest city to pay at 
all events. The other is the promise to pay if the project is 
successful and taxes (or assessments) are collected. The 
first bond may sell for 105.75. The second may sell for 80. 

Differences in value then exist between the bonds of one 
city and another, as well as between the bonds of a city and, 
for example, a school district. The purpose of issue may 
affect value very materially. In Chapter XVI, devoted to 
particular bonds, will be found statements of the peculiarities 
of bonds of different issuing subdivisions and of bonds issued 
for various purposes. 

Differences in value as between municipalities. — As be- 
tween municipalities, several factors must be taken into con- 
sideration; or, if the value of the bonds of A is to be esti- 
mated, by a consideration of the value of similar bonds of B. 
These factors are : 

1. Assessed valuations of taxable real property. 

2. Indebtedness. 

3. Tax rates. 

4. Population and 

5. Credit. 

6 Annals, p. 202. 



132 MUNICIPAL BONDS 

The factors being equal, the bonds of A, having an as- 
sessed valuation of ten million dollars, are better than the 
bonds of B which have an assessed valuation of five million 
dollars. Or again, other factors being equal, the bonds of A 
with a debt of five hundred thousand dollars are better than 
the bonds of B with a debt of seven hundred and fifty thou- 
sand dollars. If the tax rate of A is greater than that of B, 
the burden on the landowner is greater and the nearer is land 
in A to the tax saturation point. The ability of land to bear 
taxation is smaller than might be supposed by any but the 
well-informed. The larger population of B indicates growth, 
industry, and power to pay. And A, having an unbroken 
record of paying its debts, is in much better position to bor- 
row (and its bonds will be more eagerly sought for) than B 
which has defaulted at some time in the past. 

Assessed valuation. — "Assessed valuation, or assessment, 
an item always on the bond circular * * * is not hard to 
understand. It is the value put on property by assessors as 
the basis for taxation. The 'grand list' of certain States, 
e.g. Connecticut, is a synonym. * * * The 'tax duplicate' is 
another synonym." 6 So is the "abstract of ratables" in New 
Jersey. "Assessed valuation is of importance chiefly in its 
relation to the tax rate and to real valuation. Real valuation, 
in its turn, is liable to different interpretations from different 
assessors" 7 in different States and in different places in the 
same State. 

In any comparison of assessed valuations, only real estate 
valuations should be considered and the ratio of real value to 
assessed value must be determined. In a certain New York 
town some years ago, the assessed valuations were twenty-five 
per cent of the real, despite the statute requiring assessment 
at the real value. Thus the town escaped paying its fair share 
of the State and county tax, efforts of the board of equaliza- 
tion to the contrary notwithstanding. As the borrowing' 
power of this town was and is ten per cent of the assessed 
valuation, its ostensible borrowing power was only one-quar- 
ter of its real limit based on an honest assessment and the tax 
rate was of course very high. 

Comparison of assessed valuations of the same city for 
a period of years is sometimes of value, but care must be 

6 Chamberlain, p. 191. 

7 Id., p. 192. 



VALUATION OF BONDS 133 

exercised to make necessary allowance for changes in the 
basis of assessment. For example, the taxable values may 
have been sixty per cent in past years and the ratio of real to 
assessed values increased or decreased. 

Indebtedness. — The indebtedness of a municipality is 
either gross or net. In considering indebtedness, it is well to 
state separately the bonded debt, floating debt, contract debt, 
and the water debt. This segregation is important because a 
"set up" in one way may not answer all questions. 

Whether a bond is a legal investment for fiduciaries in 
New York State is determined somewhat differently from 
whether it is available to secure postal savings deposits. The 
requirements which bonds must possess to be available for 
investment by trustees and other fiduciaries, and to satisfy the 
regulations of the postal savings department, are referred to in 
Chapter XII. For example, a bond to be a legal investment 
for a trustee in New York must be that of a municipality of 
which the net debt does not exceed seven per cent of the tax- 
able property, but to be acceptable for postal savings depos- 
its, the municipality may have a net debt of ten per cent. 

Net debt may mean bonded and floating debt, less sinking 
funds, cash on hand for redemption of bonds falling due in 
the current year, and, for certain purposes, less water debt 
or debt incurred for public utilities which in contemplation of 
law are self-sustaining. The economic net debt is the indebt- 
edness to pay for which a tax must be levied. For illustra- 
tion of debt statements, see Chapter VI, and the forms 
therein referred to. Comparison of indebtedness should ob- 
viously be made only when the indebtedness is set up in the 
same way. 

Tax rates. — Tax rates are very difficult to compare. If 
A assesses the taxable property at 50% of its true valuation, 
and raises the same amount of money as B which assesses real 
property of the same true value at its true value, the tax rate 
of A will be twice that of B. Yet the bonds of A may be 
quite as good as those of B. For purposes of comparison, the 
assessed valuations of both municipalities must be equalized, 
and it is "desirable to separate the city tax from the county 
and States taxes." 8 And "there will often be distinct and 
special assessment taxes of one sort or another * * * not 
included even in the 'total tax,' but which are imposed, never- 
8 Chamberlain, p. 182. 



134 MUNICIPAL BONDS 

theless, upon such a large portion of the property within the 
corporate limits that they cannot legitimately be over- 
looked." 9 A large western city which has a low tax rate 
assesses the cost of sewers, parks, alleys, and sometimes 
streets, upon property claimed to be specially benefited. The 
assessment areas have been known to take in practically the 
entire taxable property of the city. Inquiry should be made 
whether the municipality is at the same time a school or other 
tax district, and if so whether the school or other tax is 
included in the total rate given by officials. 

The saturation point of taxation is relatively low. Three 
per cent on improved property assessed at its true value 
becomes noticeable; three and one-half per cent may be a 
burden; and a higher rate may absorb the owner's income 
from the property. Vacant property may be, and very fre- 
quently is, abandoned by the owner after the accumulation of 
a few years' taxes renders it costly to redeem. A second- 
class city in New York had over five million dollars unpaid 
taxes on its books within the past three years. Hence a high 
tax rate may be an indication of insecurity. 

Population. — Population as a factor in valuation has little 
importance, beyond a certain point. A village having two 
hundred people will have a low assessed valuation and little 
debt; a city having half a million inhabitants will have sub- 
stantial assessable values and sufficient excuse for existence 
for it to borrow money to pay for improvements. Growth 
of population is an indication of industrial and commercial 
growth which might not otherwise be revealed. Population 
may also suggest poll or capitation taxes. The more people, 
the larger the return from such taxes will be, but a poll tax 
is too uncertain and too small in amount to be a factor of 
security. Population must be known before availability for 
postal savings deposits can be determined. 

Credit is the single most important factor. — A recent de- 
fault, even carelessness in meeting interest payments, is a 
most serious matter from the dealers' or investors' stand- 
point. A great deal can be said about the meaning of munici- 
pal credit, and the fiscal history of counties and even States 
which have defaulted, but it can all be summed up by saying 
that a city's credit is shown by its financial history. Much 
water must run under the bridge before the consequences of 

•Chamberlain, p. 182. 



VALUATION OF BONDS 135 

a default will cease to be reflected in the value of a city's 
bonds. 

In practice, the valuation of bonds is described as follows 
by a buyer for a reliable and conservative investment house : 



A Study of the Comparative Market Value of State and 
Municipal Bonds 

State and municipal bonds may be divided into two classes: 

1. Those that are direct obligations secured both by the full faith and credit 
of the State or political subdivisions, and in the case of the latter, supported 
by unlimited ad valorem taxes. 

2. Those that are limited obligations of the State or political subdivision 
supported by special revenues or special taxes levied on properties bene- 
fited. 

The question of rating, or the comparative market value of bonds in either 
of these classes, may best be studied by listing the various requirements gen- 
erally sought for by investors. 

Class I 

A. Financial statement and population. 

1. Net debt within 5 per cent of assessed valuation is very conservative and 
with population of 30,000 or more, bonds have a very wide market. 

2. Net debt within 7 per cent of assessed valuation is conservative, and 
with population of 100,000 or* more, bonds have a wide market. 

3. Net debt over 7 per cent of assessed valuation passes the dividing line 
between first-grade and second-grade bonds. This is not a hard and 
fast rule, as there are many cities with over 7 per cent net debt whose 
bonds are unquestionably sound, but the market for their bonds is not 
as general. 

Bonds under subdivisions 1 and 2, when meeting all other requirements, are 
legal investment for savings bank and trust funds in New York and New 
England. With few exceptions, bonds in Class 3 are not legal. 

4. Character of population of small communities, such as villages, towns, 
school districts and sparsely settled counties, is of the utmost importance 
and must always be considered. 

B. Denomination — Coupon — Registration. 

1. Denominations of $1,000 have the best market; $500 bonds are accept- 
able; smaller denominations are not desirable. 

2. Coupon bonds which may be registered as to principal or registered as 
to both principal and interest are preferable. If interchangeable from 
fully registered to coupon, so much more desirable ; however, but few 
cities provide for this. 

3. Fully registered bonds have only a limited market. 



136 MUNICIPAL BONDS 

C. Place of Payment of Principal and Interest. 

If market for bonds is sought in the East, payment of principal and 
interest should be in New York. Local payment of principal and inter- 
est detracts from the market value, and since the demand for bonds pay- 
able in gold is very limited, where this is provided, it does not add 
materially to the value of the bond. 

D. Purpose of Issue and Maturity. 

Briefly, it is desirable that the life of the bond be within the life of the 
improvement. Bonds issued for improvement of a permanent character 
are preferred. The economic soundness of the purpose of the issue is 
given careful consideration by thoughtful investors. 

E. Local Tax Exemption. 

In certain States all current issues of bonds are exempt from State and 
local taxation. Where bonds are exempt from State and local taxation, 
they generally sell at a lower return (or higher price) than taxable 
bonds. It is accordingly necessary to know to what extent bonds are 
exempt from such taxation. 

F. Legal Features. 

1. Marketable legal opinion. 

2. Limited or unlimited taxes. 

3. Voted or unvoted bonds. (A "voted" bond evidences popular assent. — 
Author.) 

4. Debt limit. 

5. Provisions for retiring bonds at maturity. 

G. Premiums and Discounts. 

Premium bonds are not generally desired by individual investors but 
most of our large institutions and estates now amortize premiums. 
The market for a bond with a high premium is not quite as good as 
the market for a discount bond. 

H. Summary and Conclusion. 

If we find a new issue of bonds has all the features desired, we 
ascertain in what States it is a legal investment for trust funds and 
savings banks. From this we estimate the extent of the market for 
possible demand for the bonds. 

The next question is whether the bonds will have to be marketed 
at a premium, and if so, to what extent this premium will adversely 
affect the sale. 

Finally, the maturity of the issue is considered. If the bonds 
mature all at one time, the conclusion as 'to what is the market value 
is promptly arrived at, but where the issue matures serially, each 
maturity must be considered separately. 

The question of market value is decided by the old law of supply 
and demand and money market conditions. It is possible to put in writ- 
ing only comparative values of municipals, and the above is an attempt 
to cover the subject briefly. Much more may be said. Each of the above 
subdivisions is a study in itself. 



VALUATION OF BONDS 137 



Class 2 

Most of the requirements covering bonds in Class 1 might be applied to 
those in Class 2. We may emphasize, however, that the purpose of the issue, 
the character of the community borrowing the money and the legal features 
must be more carefully investigated in determining the value of bonds in 
Class 2, as against direct obligation bonds issued by States and their political 
subdivisions. 

R. M. S. 

Differences of opinion in evaluating bonds. — That differ- 
ences of opinion exist even between highly competent experts 
is shown by a consideration of the bids submitted for issues of 
Binghamton, New York, Bonds: 10 

BINGHAMTON, N. Y., Oct., 1921. 

Messrs. Blodget & Co. of New York were the successful bidders for the 
following bonds aggregating $116,200, paying a premium of $4,089.08 — 103.519, 
a basis of 4.96%: 

Park Creek Imp. 10 1/4 year (average) $ 40,000 

Pierce Creek Imp. 9 1/4 year (average) 36,000 

Oak St. School 9 1/4 year (average) 18,000 

Broad Ave. School 8 1/4 year (average) 16,700 

Cross St. Bridge 6 3/4 year (average) 6,500 

Other bidders were: 

Barr & Schmeltzer 103.678 

Sherwood & Merrifield 102.64 

George B. Gibbons & Co 102.52 

C. H. White 102.186 

Ogilby & Austin 101.96 

Peoples Trust Co., Binghamton 101.749 

National City Co 101.639 

Rutter & Co 101.59 

Lamport, Barker & Jennings 100.62 

The bids submitted at any other sale would show a simi- 
lar divergence in ideas of value. 

The difference between the high and low bid for the bonds 
referred to in this illustration is the difference, $3,368.64, 
between the premium paid by the high bidder, $4,089.08, and 
the premium offered by the low bidder, $720.44. Availability 
for sale to particular customers may account in part for dis- 
crepancies in bids. 

Sources of information. — The sources of information to 
which the prospective purchaser and investigator may turn 
are statements prepared by officials of the issuing munici- 

w The Daily Bond Buyer, October 21, 1921. 



138 MUNICIPAL BONDS 

pality, by State officers, such as superintendents of banks, 
and by financial publications. 

When bids are solicited for an issue of bonds, it is cus-. 
tomary for the city officials to prepare and send to enquirers, 
and to publish with notice of sale, a "financial statement" 
showing the gross and net indebtedness, assessed valuations 
of taxable real and personal property, the ratio between real 
and assessed valuations, the tax rate, and population. Such 
statements, being made by the seller and by officials not 
always conversant with the best practice, should be carefully 
scanned. For an example of such statements see the sum- 
mary financial statements following Chapter V. 

The superintendents of banks in New York, Massachu- 
setts, and Connecticut (alas, not in New Jersey) and other 
States, issue from time to time lists of counties, cities, and 
other political divisions, the bonds of which are "legal invest- 
ments" for savings banks, trustees and fiduciaries in their 
respective States. A summary, compiled from such a state- 
ment issued by the superintendent of banks in New York 
follows Chapter XL Such statements are valuable only in 
that they establish the fact that bonds of the included cities, 
etc., are "legal" in the judgment of and according to the best 
information the issuing official has been able to obtain. The 
omission of the name of a municipality does not necessarily 
mean its bonds are not "legal." It may only mean that its 
officials have been lazy. 

The most available and the most reliable source of in- 
formation is the Commercial and Financial Chronicle, pub- 
lished in New York City by William B. Dana Co. In the 
State and City Supplement, published semi-annually, complete 
and accurate municipal statistics may be found, together with 
abstracts of the laws of the various States governing the 
issue of municipal bonds. The greatest care is taken by the 
publishers to make and keep such information accurate and 
timely, and statements in the Chronicle may be relied upon. 

In the last analysis, the estimation of bond prices suggests 
the explanation by a great painter of his brilliant colours. 
When asked how he mixed his paints to obtain such results, 
he replied: "With brains, sir, with brains." 



Content of Advertisement which Appeared in the New York 
"Sun," November i, 192 1 



Twenty Years Ago 



Below is a list of municipal bonds which we owned 
and offered for sale during the year 1901: 



CHICAGO 

204 Dearborn Street 

(Marquette Bid' g.) 



NEW YORK 

31 Nassau Street 

(Nat'l Bank of Commerce Bld'g.) 



BOSTON 

67 Milk Street 
(Equitable Bld'g.) 



NEW YORK, 1901 

We own and offer, subject to prior sale and advance in price, 

the following bonds : 



Amount 



Name of Security 



Price and Net 
Rate Maturing in Interest Return 



% 30,000 State of New York, Registered 
200,000 State of Massachusetts 
50,000 City of Boston, Massachusetts, 
Registered 
156,000 Detroit, Michigan, School 
200,000 Milwaukee, Wisconsin, School 
122,000 Buffalo, New York, Registered 
100,000 Chicago, Illinois 
50,000 Newark, New Jersey, Water 
50,000 City of New York, Registered 
20,000 State of Louisiana, Coupon 
100,000 State of Tennessee, Registered 
523,000 City of Allegheny, Pennsylvania, 

Registered 
125,000 Fort Wayne, Indiana, School City 
100,000 Greene County, Ohio, Court House 
45,000 Blackhawk County, Iowa, Court 

House 
20,000 South Bend, Indiana 
100,000 Waukesha County, Wisconsin, 
Asylum 
71,500 Rock Island, Illinois, School District 
50,000 Clinton, Iowa, Ind. Scbool District 

Refunding 
20,000 Colorado Springs, Colorado, School 

District Refunding 
42,000 St. Joseph, Missouri, School District 
38,000 Springfield, Illinois, Refunding 
25,000 Peoria, Illinois, Park District 
15,000 Danville, Illinois, Refunding School 
26,000 Lima, Ohio, Refunding 
200,000 Lee County, Iowa, Refunding 
96,000 Jeffersonville, Indiana 
25,000 Sanitary District of Chicago 
25,000 Gallatin County, Illinois, Refunding 
23,000 Council Bluffs, Iowa, Refunding 
59,000 County of Cascade, Montana 
46,000 City of Norfolk, Virginia, Imp. 

Refunding 
30,000 Nashville, Tennessee, Refunding 
125,000 City of Memphis, Tenn., Sinking 

Fund, Park 
100,000 Roane County, Tennessee, Funding 
20,000 Bexar County, Texas, Court House 



3 


11 Years 


104 


2.55 


3 


38 Years 


104% 


2.83 


3% 


29 Years 


109% 


3.03 


3% 


28 Years 


109 


3.03 


3% 


1 to 20 Years 


Various 


3.05 


3% 


19 Years 


106% 


3.05 


4 


14 Years 


110% 


3.10 


4 


21 Years 


113% 


3.10 


3% 


27 Years 


106% 


3.12 


4 


13 Years 


109 


3.15 


3 


12 Years 


98 


3.20 


3% 


2 to 25 Years 


Various 


3.20 


3% 


5 to 20 Years 


Various 


3.20 


4 


5 to 29 Years 


Various 


3.20 


4 


10 Years 


106% 


3.20 


3y 2 


10 Years 


102i/ 2 


3.20 


3.65 


4 to 21 Years 


Various 


3.25 


4 


5 Years 


103 y 2 


3.25 


4 


10 Years 


103 y 2 


3.25 


4 


20 Years 


104% 


3.25 


4 


9 to 19 Years 


105% 


3.30 


3Vo 


20 Years 


102 % 


3.30 


'3V>, 


20 Years 


102 % 


3.30 


4 


8 to 10 Years 


Various 


3.30 


3Vo 


24 to 29 Years 


103% 


3.30 


3% 


1 to 19 Years 


Various 


3.30 


3% 


24 Years 


101 


3.45 


4% 


2 Years 


102.14 


3.50 


4 


7 to 10 Years 


Various 


3.50 


4V> 


14 to 15 Years 


Various 


3.50 


4 


20 Years 


105% 


3.63 


4 


28 Years 


104 


3.70 


4 


17 Years 


103% 


3.70 


4 


12 to 29 Years 


Various 


3.80 


4 


20 Years 


101% 


3.875 


6 


33 Years 


105% 


3.875 



SPECIAL CIRCULARS ON REQUEST 

The remarkable change in price and interest return on similar representative issues 
in the twenty years intervening may be seen from the list of municipal bonds we 
now offer to yield from 5% to 6%. In some instances these are issued by the same 
municipalities whose bonds we offered twenty years ago. We shall be pleased to 
send circulars describing our present offerings in detail. We suggest you ask for 
List W-ll. 

HARRIS, FORBES & COMPANY 
Pine Street, Corner William, New York 



Harris, Forbes & Company 

Incorporated 

Boston 



Harris Trust and Savings Bank 

Bond Department 

Chicago 



139 



The Bond Buyer's Index of the Municipal Bond Market 


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140 



VALUATION OF BONDS 



141 



New Bond Offerings of the Week Ended 

Interest 

Amount Description Rate 

$ 100,000 City of St. Petersburg, Fla., im- 
provement 6 

100,000 Richmond County, N. C, court 

house 6 

2,250,000 Little Rock and North Little Rock, 

Ark., bridge 5-1/2 

503,000 Harris Co., Texas, Houston Ship 

Channel 5 

1,200,000 City of Lexington, Ky., municipal 

improvements 5 

181,000 Stephens Co., Tex 5-1/2 

515,500 City of Wilmington, Del 5 

500,000 Allegheny County, Pa., tunnel.... 4-1/2 

2,000,000 Mississippi Co., Ark., drainage 

district 6 

85,000 City of Tonawanda, N. Y., school 5 

486,000 City and County of California, 

water 4-1/2 

39,000 Gloucester Co., N. J., road 6 

42,000 Ocean City, N. J., improvement... 6 

1,500,000 State of Mississippi 4-3/4 

1,200,000 City of Charlotte, N. C 5-1/4 

399,500 City of Calgary, Alberta 6 

456,000 Summit Co., Ohio, road 6 

80,000 City of Yakima, Wash., sewer.... 6 

117,000 Town of Westfield, N. J., im- 
provement 5-1/2 

1,000,000 Ouachita Parish, La., road 6 

3,015,000 Los Angeles City, School District, 

Cal 5-1/2 

7,360,000 City of Buffalo, N. Y., school, 

hospital and sewage 4-1/2 

450,000 Yazoo - Mississippi Delta Levee 

District 4-1/2 

1,100,000 Dunklin Co., Mo 5 

55,000,000 City of New York corporate stock 4-1/2 

*From the New York Times. 



Dec. 16, 1921 * 



Term of 


Yield 


Years 


Per Cent 


9-30 


5.50 to 5.60 


10-30 


5.25 to 5.50 


1-29 


5.30 to 5.50 


1-28 


5 


4-39 


4.50 to 4.70 


3-6 


6-1/4 


34-36 


4.30 


5-27 


4.25 


4-21 


6,25 


2-31 


4.20 to 4.75 


3-17 


4.65 to 4.80 


1-5 


4.80 


2-12 


5.20 to 5.40 


3-26 


4.40 to 4.70 


3-41 


4.80 to 4.90 


30-50 


6 


2-7 


4.80 


20 


5.15 


2-30 


4.40 to 4.60 


1-38 


5.60 to 6 


2-39 


4.60 to 4.90 


1-21 


4.05 to 4.20 


5.35 


5.20 


3-21 


5.10 


50 


4.25 



142 



MUNICIPAL BONDS 



New Bond Offerings of the Week Ended 

Interest 

Amount Description Rate 

$ 116,000 Duval County, Fla., bridge 5 

1,264,000 City of Bayonne, N. J., school and 

improvement 5 

1,500,000 State of Mississippi improvement.. 4-3/4 

2,310,000 Allegheny Co., Pa., road and bridge 4-1/2 

7,000,000 State of California highway 5 

175,000 City of Pueblo, Col., public way ** 5 

216,000 Sumter Co., Ga., improvement.... 5 

180,000 City of Portland, Ore., improvement 5 

260,000 Springfield, Ohio, school 5-1/2 

230,000 Nogales, Ariz., water 5-1/2 

140,000 Carter Co., Tenn 6 

* From the New York Times. 
** Optional, Nov. 1, 1931. 



Dec. 30, 1921 * 



Term of 


Yield 


Years 


Per Cent 


37 


4.875 


3-30 


4.40 to 4.60 


2-25 


4.40 to 4.70 


1-30 


4.15 


22-28 


4.30 


15 


5 


2-28 


4.80 


4-31 


4.40 to 4.70 


7-28 


4.65 to 4.80 


15-29 


5.70 to 5.80 


30 


5.40 



Results of New York City Bond Sales 



Date of Sale 
and Amount 


Interest 
Rate 


Years 


Average 
Price 


Income 
Basis 


Dec. 15, 1921 
$55,000,000 


4-1/2 


50 


103.407 


4.333 


July 12, 1917 

$47,500,000 

7,500,000 


4-1/2 
4-1/2 


50 
1-15 Ser. 


100.6507 
100.6507 


4.46 
4.39 


April 19, 1916 
$40,000,000 
15,000,000 


4-1/4 
4-1/4 


50 
1-15 Ser. 


102.618 
101.432 


4.126 
4,028 


June 29, 1915 

$46,000,000 

25,000,000 


4-1/2 
4-1/2 


50 
1-15 Ser. 


101253 
101.306 


4.437 
4.297 


April 15, 1914 

$65,000,000 


4-1/4 


50 


101.45 


4.18 


May 20, 1913 
$45,000,000 


4-1/2 


50 


101.137 


4.49 


May 7, 1912 
$65,000,000 


4-1/4 


50 


100.747 


4214 



VALUATION OF BONDS 



143 



Results of New York City Bond Sales — Continued 



Date of Sale 
and Amount 


Interest 
Rate 


Years 


Average 
Price 


Income 
Basis 


Jan. 24, 1911 
$60,000,000 


4-1/4 


50 


100.904 


4.207 


March 21, 1910 
$50,000,000 


4-1/4 


20-50 


101.28 


4.155 


Dec. 10, 1909 
$12,500,000 


4 


50 


100.34 


3.98 


June 8, 1909 

$38,000,000 
2,000,000 


4 
4 


50 
10 


100.71 
100.14 


3.96 
3.98 


March 2, 1909 
$10,000,000 


4 


50 


101.57 


3.93 


Nov. 23, 1908 
$12,000,000 
500,000 


4 
4 


50 
10 


102.385 
101.52 


3.89 
3.82 


Feb. 14, 1908 

$47,000,000 

3,000,000 


4-1/2 
4-1/2 


50 
10 


104.22 
100.90 


4.29 
4.38 


Sept. 10, 1907 

$35,000,000 
5,000,000 


4-1/2 
4-1/2 


50 
10 


102.063 
100.30 


4.39 
4.46 



Wholesale Prices in the United States for no Years 





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H10 1530 l£30 I8f0 1850 I860 IS70 



1890 1900 



Content of Advertisement Showing Offering of $31,800,000 
State of New York Gold 5% Bonds* 

$31,800,000, State of New York, Gold 5% Bonds 

Dated January 1 and March 1, 1921 Due serially 1922 to 1971, inclusive 

Principal and semi-annual interest payable in gold at the Bank of the Man- 
hattan Company, New York City. Coupon bonds in the denomination of 
$1,000, which may be exchanged for bonds registered as to principal 
and interest in denominations of $1,000, $5,000, $10,000 and $50,000. 

Exempt from the New York State Income Tax, and free from all Fed- 
eral Income Taxes. Legal investment for Savings Banks and Trustees 
in New York, all New England and in other States. 

Eligible as security for Postal Savings Deposits. 

Acceptable to the State of New York as security for State Deposits, to 

the Superintendent of Insurance to secure policyholders and to the 

Superintendent of Banks in trust for banks and trust companies. 

The assessed valuation of property subject to taxation for State purposes is 
officially reported as $14,850,989,607. The gross bonded debt, including this 
issue, is $267,729,000. Sinking funds are $76,218,877, making a net bonded 
debt of $191,510,123, or about 1% % of the assessed valuation. The popula- 
tion, according to the U. S. Census for 1920, was 10,384,829. The outstanding 
debt of the State is secured by taxes levied to meet principal and interest at 
maturity. The present offering consists of $20,000,000 bonds for Highways, 
$6,800,000 for Barge Canal Terminals and $5,000,000 for the acquisition of 
lands for the State Forest Preserve, and matures $500,000 March 1 and $136,000 
January 1 each year from 1922 to 1971 inclusive. 







MATURITIES, AMOUNTS AND PRICES 










(Accrued interest to be added) 






Maturity 


Amount 
$636,000 


Price Ti 


eld About 
5.25% 


Maturity 
1647 


Amount 
$636,000 


Price 


Yield About 


1922 


99.85 


104.44 


4.70% 


1923 


636,000 


99.62 


5.25% 


1948 


636,000 


104.53 


4.70% 


1924 


636,000 


99.39 


5.25% 


1949 


636,000 


104.62 


4.70% 


1925 


636,000 


99.18 


5.25% 


1950 


636,000 


104.70 


4.70% 


1926 


636,000 


99.19 


5.20% 


1951 


636,000 


104.77 


4.70% 


1927 


636,000 


99.28 


5.15% 


1952 


636,000 


104.85 


4.70% 


1928 


636,000 


99.44 


5.10% 


1953 


636,000 


104.92 


4.70% 


1929 


636,000 


99.69 


5.05% 


1954 


636.000 


104.99 


4.70% 


1930 


636,000 


100.00 


5.00% 


1955 


636,000 


105.05 


4.70% 


1931 


636,000 


100.37 


4.95% 


1956 


636,000 


105.11 


4.70% 


1932 


636,000 


100.83 


4.90% 


1957 


636,000 


105.17 


4.70% 


1933 


636,000 


101.32 


4.85% 


1958 


636,000 


105.22 


4.70% 


1934 


636,000 


101.88 


4.80% 


1959 


636,000 


105.28 


4.70% 


1935 


636,000 


102.49 


4.75% 


1960 


636.000 


105.33 


4.70% 


1936 


636,000 


102.61 


4.75% 


1961 


636,000 


105.37 


4.70% 


1937 


636,000 


102.75 


4.75% 


1962 


636,000 


105.42 


4.70% 


1938 


636,000 


102.85 


4.75% 


1963 


636,000 


105.46 


4.70% 


1939 


636.000 


102.96 


4.75% 


1964 


636,000 


105.51 


4.70% 


1940 


636,000 


103.07 


4.75% 


1965 


636,000 


105.55 


4.70% 


1941 


636.000 


103.82 


4.70% 


1966 


636,000 


105.58 


4.70% 


1942 


636,000 


103.93 


4.70% 


1967 


636,000 


105.62 


4.70% 


1943 


636,000 


104.05 


4.70% 


1968 


636,000 


105.65 


4.70% 


1944 


636,000 


104.15 


4.70% 


1969 


636.000 


105.69 


4.70% 


1945 


636,000 


104.25 


4.70% 


1970 


636,000 


105.72 


4.70% 


1946 


636,000 


104.35 


4.70% 


1971 


636,000 


105.75 


4.70% 


The above information is based 


upon official statements and statistics on which we 




have relied 


in the purchase of these bonds. 


We do not guarantee 






but 


: believe it 


to be correct. 







First National Bank, New York — Bankers Trust Company — Harris, Forbes 
& Company — The National City Company — Guaranty Company of New York — 
Brown Brothers & Company — E. H. Rollins & Sons — Kissel, Kinnicutt & Co. — 
Potter Brothers & Co. — Bernhard, Scholle & Co. — Remick, Hodges & Company — 
William R. Compton Co. — Eastman, Dillon & Co. — Redmond & Co. — Stacy & 
Braun — Robert Winthrop & Co. 

* From the New York Sun, June 10, 1921. 

144 



Chapter XV 
INCONTESTABILITY AND VALIDATION 

Improvement in civic sense of honesty. — In the merry 
days of reconstruction, expansion and industrial development 
following the war between the States, repudiation of munici- 
pal bond issues was not only frequent, but seemed in many 
cases not to be regarded as bad faith. However, a default 
in payment of interest or principal, then as now, almost in- 
variably involved a moral default. That there has been an 
improvement in standards of business ethics in the last gen- 
eration is a matter of common knowledge and it is gratifying 
to record that the civic sense of honesty leads the business 
sense of fair dealing. It is not that "business methods have 
been applied to politics," but political methods have been 
applied to business. 

Nevertheless defaults do occur, and with sufficient fre- 
quency to keep the investment banker, the purchaser of bonds, 
and the skilled specialist ever on the alert. That the number 
is decreasing is due to many reasons, not the least being the 
knowledge that honesty not only is the best policy, but that 
honesty is absolutely essential if the municipal corporation is 
to continue to function. A reputation for default, even for 
tardiness, makes it difficult for the municipality to borrow for 
any purpose. 

Progress on legal side. — Great progress has been made 
on the legal side. As municipal bonds must be authorized by 
statute, general or special, statutes are better drafted avoid- 
ing the errors shown by experience. Practical experience and 
legal skill have joined forces to produce sound and workable 
laws, the object of which is the protection of the investor, 
until today the fiscal legislation of many States in this coun- 
try leaves little to be desired, either in form or substance. 
Among statutes of this kind are Arthur N. Pierson's Act to 
Regulate the Issue of Bonds by New Jersey Municipalities, 1 

a P. L., 1917, Chap. 240. 

145 



146 MUNICIPAL BONDS 

and William Henry Hoyt's Municipal Finance Act for North 
Carolina, 2 both of which have been improved and marred 
by subsequent tinkering. 

Imperfection of all legislation. — The history of legisla- 
tion, and indeed of all law, has shown that the mind of man 
cannot create statutes or laws which are perfect or in which 
the trained (not to mention the criminal) mind cannot detect 
flaws. This has been true with fiscal legislation. Where de- 
fault has seemed advisable, necessary or inevitable to the 
imperfect moral sense, opportunity has not been lacking to 
hang the default upon the peg of illegality. To anticipate 
the consequences of a desire for repudiation is the business of 
the draftsman of fiscal legislation, and in examining such leg- 
islation we find various expedients which tend to make default 
difficult or impossible or assure legality of the bonds, in 
advance of issue. 

Estoppel. — First among such devices is employment of 
the legal doctrine of estoppel, by which is meant that under 
certain circumstances we may not deny the truth or propriety 
of what we have previously said or done. So a municipality 
having the power to issue bonds, may be estopped, or pre- 
vented, by recitals in the bonds, from denying their legality. 
The effect of Judge Dillon's estoppel clause has been referred 
to in Chapter I, and the language of the clause given in the 
bond forms in and following that chapter. The force of such 
an estoppel rests upon the rule that the municipality can be 
bound by the agents or officers, by whom alone it can act, if 
they "keep within the limits of the chartered authority of 
the corporation." 3 The doctrine is asserted for the protec- 
tion of the bondholder and ordinarily has "no place in con- 
troversies which arise before the issue of the bonds." 4 

Provision can, however, be made in advance of the issue, 
to give effect to estoppel. A New York statute reads: "An 
ordinance creating a funded debt may provide that the bonds 
therein authorized shall contain a recital that they are issued 
pursuant to law and an ordinance of the common council, as 
provided by section sixty of the Second-class Cities Law. Such 
recital, when so authorized, as aforesaid, shall be conclusive 
evidence of the regularity of the issue of said bonds and of 

2 P. L., 1917, Chap. 138, as last revised by an Act ratified December 20, 
1921. 

3 Dillon, p. 1179. 
'Id., p. 585. 



INCONTESTABILITY AND VALIDATION 147 

their validity." 5 And it would be so, provided that the 
city had the power to issue the bonds. As to irregularities 
in the proceedings preliminary to issue, such recital is con- 
clusive. 6 

As questions of power are sometimes questions of limita- 
tion, some statutes provide that the determination of certain 
facts by certain officials shall be final. The New Jersey Bond 
Act provides that: "The determination of the governing body 
as to the classification of purposes * * * for which bonds 
are issued and as to the probable period of the usefulness of 
any improvement or property, and as to the maturities of the 
proposed bonds based thereon, shall, upon a majority vote 
of all the members of such body in office, be conclusive in any 
action or proceeding involving the validity of said bonds." 7 
The doctrine of estoppel is invoked in advance of issue and 
the effect of such a statutory provision depends upon it. 

Short statutes of limitations. — By a statute of limitations, 
sometimes aptly called a statute of repose, is meant a statu- 
tory provision that lawsuits must be begun within a stated 
period, longer or shorter according to the facts and character 
of the lawsuit or action. For example, in many States a suit 
brought to recover damages for breach of a contract must be 
commenced within six years from the time the cause of action 
arose. In applying such statutes in practice, the courts say 
in effect: "You must not sleep on your rights. If you come 
here for redress, you must come promptly. Otherwise, the 
legislature says you may not take up our time." 

An application of this principle is found in the New Jer- 
sey statute so frequently quoted. After an ordinance or reso- 
lution is adopted, it is required to be published. "The clerk 
shall publish with such ordinance or resolution a statement in 
substantially the following form: The foregoing (ordinance 

or resolution) was (adopted or approved) on the day 

of , 19 — . The bonds authorized thereby 

will be issued and delivered after the day of , 

19 — (specifying a day not less than twenty days after the 
first publication), and any suit, action or proceeding to set 
aside or vacate this (ordinance or resolution) must be begun 
within twenty days after the publication of this statement." 8 

5 Cons. Laws, Chap. 53, Sec. 60. 

6 Dillon, p. 1179. 

7 P. L., 1917, Chap. 240, Sec. 4 (4). 

8 P. L., 1917, Chap. 240, Sec. 2 (1) (d). 



148 MUNICIPAL BONDS 

In construing and applying this provision, the Supreme 
Court of New Jersey said: "* * * in the absence of the 
protest provided for by the act, we are compelled to the con- 
clusive presumption that the ordinance was duly and regu- 
larly passed and complied with the statute; by express statu- 
tory provision the validity of the ordinance cannot be ques- 
tioned, since no action or proceeding was commenced prior 
to the expiration of the 20 days." 9 The presumption would 
not be conclusive in a case where there was no lawful 
authority to issue the bonds. 

Validation by decree. — It has been noted in this book and 
by other observers 10 that the tendency of the courts is to 
hold bonds valid when in the hands of innocent purchasers 
for value, without notice and before maturity. Such a result 
inevitably followed the application of the Law Merchant 
and the Uniform Negotiable Instruments Law, to municipal 
bonds. Unfortunately, such adjudications follow defaults 
and do not precede them; and it is gready to be desired that 
conclusive adjudications, determining the legality of bond 
issues, should precede issue. Such a result is attempted to be 
secured in two ways, that is, by submitting the record and pro- 
ceedings, before issue, to (a) an administrative department, 
or (b) the courts, so that a judgment may be secured, binding 
not only on all parties to the proceeding, but on all those 
who might properly be parties, in the present and in the 
future. The legal doctrine of res adjudicata is outside the 
scope of this essay, but as it underlies the idea of validation 
by decree, it is necessary to define the term. By res adjudi- 
cata is meant that all questions which might have been deter- 
mined in a litigation based upon the facts are so determined 
whether specifically presented for determination, or not, and, 
theoretically, at least, not only as between the parties, but as 
to all persons who might have been or properly could be made 
parties. In short, if a court says a bond issue is legal, it is so, 
even though all the defects in the proceedings are not brought 
to the attention of the court. 

The effectiveness of statutes providing for such valida- 
tion, that is, by administrative or judicial decree, depends 
upon constitutional limitations in those States where the line 

8 Dale v. Bayhead (1917), 90 N. J. Law 49, 100 Atl. 329; see also Walters 
<v. Bayonne (1918), 89 N. J. Equity 384, 104 Atl. 770. 

10 Lagerquist, p. 575; Chamberlain, p. 236; Jordan, p. 82 and others. 



INCONTESTABILITY AND VALIDATION 149 

of demarcation is clearly drawn between the legislative, judi- 
cial, and executive departments of government. In such 
States it is not competent for the legislature to impose judi- 
cial functions upon the executive, or legislative functions upon 
the courts. 

An attempt to authorize a governmental department to 
exercise judicial and legislative functions in New York, where 
such limitations exist, has been made by the Education Law 
and the General Municipal Law. 

The Education Law. 11 — This statute provides that a 
trustee, board of education, elector or taxpayer of a school 
district, or a purchaser of its bonds, may institute a proceed- 
ing before the commissioner of education for the purpose, 
among others, of "legalizing and validating the bonds" of 
the school district. If it appear to the commissioner of edu- 
cation that the proceedings taken "substantially comply" with 
the statute "he shall render a decision ratifying and confirm- 
ing such acts and proceedings." In other words, he may say 
the law has been observed. But the statute goes on to say: 
"If there has been a fair expression of the will of the qualified 
electors of the district, and it appears that the action taken 
was not affected or prejudiced by defects in, or failure to give, 
the notice required by statute, or if it appears that the fail- 
ure to take, or a defect in any step in the acts or proceedings 
of district officers or meetings did not influence materially, 
the result of such meetings, the commissioner may disregard 
such defects or failure and determine that there has been a 
substantial compliance with the statute." 

The statute has not been passed upon by the courts, but 
in view of the principle stated above, and the language of the 
Supreme Court in the Lackawanna case hereafter referred to, 
it is to be assumed that the attempt to vest the commissioners 
of education with judicial functions is unconstitutional. 

The General Municipal Law. 12 — This statute provides for 
a proceeding in the Supreme Court, based upon a petition 
made by interested parties (that is, municipal officials, tax- 
payers, purchasers or holders of the bonds) setting forth all 
facts in relation to the bond issue "for the purpose of legaliz- 
ing and confirming such proceedings * * * and also the issu- 
ance, sale and form of such bonds." The court is given juris- 

11 Cons. Laws, Chap. 16, Sec. 480, sub. 7, added by Laws of 1917, p. 1276. 
13 Cons. Laws, Chap. 24, Sees. 22 to 29, 



150 MUNICIPAL BONDS 

diction to determine that the statute authorizing the bonds 
"was substantially complied with" if certain conditions speci- 
fied in the act have been complied with, "notwithstanding any 
irregularity or technicality" mentioned in the act. 

In construing this statute in the Lackawanna case 13 the 
court said: "There is, then, found in 'the statute' a simple 
and comprehensive legislative scheme whereby the legislature 
has declared in substance that all municipal bond issues shall 
be valid, wherein the sole objection thereto lies in certain 
specified and defined technical irregularities, and whereby 
there is committed to the Supreme Court the purely judicial 
function of determining in each instance where the statute is 
involved the question of fact 14 of whether there are or not 
any other irregularities than those mentioned in such statute. 
It is thus made clear that the bond issues acquire their validity 
solely from the legislative enactment and not from the court, 
and there is, therefore, no legislative function committed to 
the court." In other words, if the bonds are authorized by 
the statute and the proceedings are regular, the court may 
say so, but it has no jurisdiction to declare the bonds legal, 
if they are not. 

The two preceding illustrations are given to show the 
difficulties of validation by decree where the State constitu- 
tion contains inhibitions. In the words of the Bishop of 
Rum-ti-foo: "No; that is a length to which, I trow, Colonial 
Bishops cannot go. You may express surprise" to find that 
there are constitutional limits to legislation. Legislative 
draftsmen and legislators frequently find it is so. 

Judicial validation in Georgia. — In Georgia, however, as 
in France "they order this matter better," or at least a con- 
stitutional, workable scheme of judicial validation has been 
enacted. This statutory plan in substance is as follows : 15 

When a proposition to issue bonds has been adopted at 
an election, notice is given to a designated State official, who 
begins an action against the county or municipality which 
desires to issue the bonds. An order is obtained directing the 
county or municipality to show cause "why the bonds should 
not be confirmed and validated." A hearing is had and deter- 
mination made as to "all the questions of law and of fact." 

33 Matter of Lackawanna (1913), 158 App. Div. 263, 

"Italics mine.— F. B. 

"Civil Code 1910; Sec. 445 et seg. 



INCONTESTABILITY AND VALIDATION 151 

If the proceedings are approved, and there appears to be no 
difficulty about it, for the defendant municipality or county 
wants the bonds issued, a judgment is entered. The effect of 
such judgment is "forever conclusive upon the validity of the 
bonds against the county, municipality, or division, and the 
validity of said bonds shall never be called in question in any 
court" of the State of Georgia. 

An objecting taxpayer can intervene in the action and 
attack the regularity of the proceedings. The act requires 
due notice, constructive but nevertheless legally sufficient, and 
is sound in principle. 

Judicial validation sustained. — Such validation has been 
sustained. A typical instance of litigation in which the con- 
stitutionality of the statute was sustained by inference and a 
possible default prevented, is Dumas v. Rigdon. 1 * Certain 
taxpayers of Tift County, Georgia, sought to restrain the 
collection of a tax levied for the purpose of paying the prin- 
cipal and interest of bonds of the Chula School District, on 
the ground that the district had never been legally created. 

The bonds were issued in 1918, shortly after the district 
was laid off by the county board of education, and the order 
validating the bonds was made in August, 1918. 

In support of the application for an injunction, it was 
alleged: "that the entire territory of Tift County has never 
been laid off into school districts, nor have the district lines 
been defined and marked as required by law, nor have the 
school districts been laid off according to law, but they have 
been laid off in disregard of the provisions of the statutes 
upon that subject; that no map of the county showing the 
school districts, as required by law, has been made; that cer- 
tain specified lots were illegally transferred to the Chula dis- 
trict: that several lots in the county were not in any school 
district, and that some four or five lots, containing an aggre- 
gate of some 2,000 acres of land, were illegally taken from 
the Chula district; that, upon other grounds specified, a divi- 
sion of the county into school districts, if ever made, was 
illegally made, without reference to best interest and the con- 
venience of those who were included in and excluded from 
the district; that the territory from which the tax is to be 
collected is incapable of exact determination, never having 

16 (1921), 151 Ga. 267, 106 S. E. 261. 



152 MUNICIPAL BONDS 

been exactly laid out, marked, and defined, as required by 
law." 

The Georgia Supreme Court, sustaining the judgment of 
the lower court refusing an injunction, said : 

"The bonds in question were duly validated in accordance 
with the provisions of the Civil Code 1910, Sec. 445 et seq., 
relating to bonds and their validation. Questions of whether 
the law in regard to laying off the country into school districts 
had been complied with, and whether other steps were taken 
by the proper county authorities to make this laying off and 
division of the county into school districts conformable to 
law, as embodied in section 1531 et seq., of the Civil Code, 
upon the subject of school districts and local tax for public 
schools, could and should have been made in the proceedings 
to validate the bonds, the legality of which is now challenged." 

Registration. — Differing from validation by decree, more 
in form than in substance, is registration of bond issues with 
public, usually State, officials. Registration in this sense is not 
the same in its legal effect as the registration referred to in 
Chapter II. When a bond is registered with a public official, 
it is presented to the official and a notation in a proper record 
book is made, describing the bond by its number, date, pur- 
pose, maturity, interest rate, and other details. Such regis- 
tration is intended to preserve a public record of the issue 
of the bonds. The effect of such registration depends upon 
the statute pursuant to which the bond is registered. The 
constitutional difficulty above referred to may exist as to 
registration of this sort, but assuming it does not, the regis- 
tration is of two kinds : 

(a) Where judicial functions are performed by the regis- 
tering official, in which case registration may be conclusive as 
to validity (or not) according to the statute; 

(b) Where ministerial functions only are performed, 
that is, there is no discretion with the registering official, in 
which case registration ordinarily does not validate the issue. 

"The effect of registration pursuant to statute," says 
Judge Dillon, "is to be determined by the language and intent 
of the enactment. If from a consideration of the language 
used, and a reasonable construction thereof, it appears that 
the legislature intended to entrust to an officer the duty of 
determining the validity of the bonds before registering them, 
his certificate of registration is an adjudication of validity 



INCONTESTABILITY AND VALIDATION 153 

which operates as an estoppel. If, however, the statute ex- 
pressly declares that registration and the certification of the 
officer shall not have this effect, or that the certificate shall 
only be prima facie evidence of the facts stated and shall not 
prevent proof to the contrary in any suit involving the 
validity of the bonds, or the power and authority of the mu- 
nicipality in whose name they are executed, to issue them, all 
conclusive effect must be denied to the registration and the 
certificate." 17 

It should be noted that if the statute pursuant to which 
bonds are issued, requires registration and certification as a 
condition precedent to validity, such registration and certifica- 
tion is essential to the complete execution of the instruments 
so as to bind the municipality for their payment. 18 

Certification of signatures and seal. — If a bond is stolen 
before it has been issued by the municipal authorities, it has 
no legal inception, and it is inoperative even in the hands of 
a bona fide purchaser for value. 19 Hence if a blank bond 
which is ready for execution but has not been executed, is 
stolen and the signatures and seal forged, the municipality is 
not liable, except possibly where the facts show gross negli- 
gence, in which case the recovery, if any, would be because of 
such negligence. The condition of the law in this respect is 
comforting to the municipality, but would hardly add to the 
happiness of an innocent holder for value of forged securities. 

Forgery is an ever-present and real menace, as everyone 
knows who has to deal with securities. How is the purchaser 
to know the bonds he buys are genuine? At the time of issue 
there is no particular difficulty, because executing officials are 
identified and signature certificates provided and made by 
trustworthy bank officials. But a signature certificate cannot 
readily be made for each bond and delivered with it as the 
bonds are retailed. 

The United States Mortgage and Trust Company of New 
York, and institutions in other parts of the country, meet this 
difficulty by endorsing their certificate on each bond, that the 
signatures and seal are genuine. Elaborate precautions to 
guard against forgery are taken by the bank mentioned, which 
requires that bonds be printed or engraved under its super- 

17 Dillon, pp. 1520 to 1522. 
U /J., p. 1272. 
13 Id., p. 1546. 



154 MUNICIPAL BONDS 

vision, on its specially prepared water-marked paper. The 
utmost care is exercised to see that the officials are properly 
introduced and identified. Lastly, this bank must know that 
counsel has approved the proceedings, before it permits the 
executed pieces out of its possession. 

In considering the subject and the contents of this chapter, 
the author is reminded of the many expedients proposed to 
end the World War, such as Henry Ford's peace ship, which 
was to "get the boys out of the trenches by Christmas." All 
devices to make bonds incontestable and to validate them 
before issue are to some degree expedients and where statutes 
require action to this end before issue, an additional burden 
of compliance with formalities is placed upon municipal offi- 
cials and examining counsel. Everything considered, no device 
or expedient takes the place of adequate statutes and strict 
compliance with the requirements of the enabling acts. 



Chapter XVI 
PARTICULAR BONDS 

Bonds classified. — It has been pointed out that there is a 
difference between bonds issued by a city and those issued by 
a school district; in other words, there is a difference between 
bonds with regard to the issuing political unit. This dif- 
ference arises because the powers of the issuing bodies differ 
not only as between themselves, but as between classes. There 
is a difference between bonds considered in relation to the 
purposes for which they are issued and as to method of pay- 
ment. In the following pages the salient features are pointed 
out, of city, county, and tax district bonds, of bonds issued 
for various purposes and of bonds having different tax means 
of payment. Much will be a summary of principles, and 
much that is said depends upon the application of general 
principles. 

City bonds. — Cities have, by virtue of their charters, more 
or less complete self-governmental power, according to their 
size, geographical location, and commercial importance. The 
city is expected to have full and complete powers of taxation 
and it also has incidental powers, such as the power to borrow 
money in anticipation of its revenue. It is because of this 
that bonds of a city are relatively better supported than are 
bonds of the minor political subdivisions. To a lesser extent 
this is true of towns, villages, and boroughs. A city is, and 
must be, a going concern and should always maintain its 
credit, in order that it may borrow in anticipation of taxes to 
pay running expenses and to meet emergencies. Cities have 
large general powers to raise money, have funds on hand 
available to pay the interest on, and maturing principal of, 
their obligations, and then are more businesslike in making 
provision for maturing debts, than less highly organized po- 
litical subdivisions. 

County bonds. — Considered from the angle of the issuing 
political unit, county bonds must be separately classified, as 
pointed out in Chapter III. Counties are in a class by them- 

155 



156 MUNICIPAL BONDS 

selves, being major political subdivisions of the State, with 
many municipality powers, but not true municipal corpora- 
tions. There is no difference in the eyes of the law, between 
bonds of a county and a city, but there is a very practical 
difference, for the reason that the purposes for which coun- 
ties may issue bonds are relatively few in number and the 
total amount of bonds issued is small in proportion to the 
total assessed valuation of taxable property in the county. 

In many States, county taxes are more certain of payment 
than taxes of a city or town, because of the plan of collection. 
Thus, the county taxing or budget-raising body determines the 
amount of the annual county budget, apportions the amount 
among the included municipalities, and other taxing units, 
and notifies them of the respective amounts to be raised. 
The various municipalities must find the money and pay their 
share into the county treasury, even though they are obliged 
to borrow for the purpose before the taxes are collected. 

It will be remembered that the county debt statement is 
misleading and for the purposes of comparison of debt be- 
tween counties, the debts of included subdivisions, such as 
cities, towns and villages should be considered. Another fac- 
tor which we rarely take into account is contingent liability 
for the debts of included subdivisions. A county may pledge 
its credit on behalf of a tax district. Even though the prop- 
erty in the tax district is primarily liable to a tax for the pay- 
ment of the bonds, a secondary liability arises if there is a 
default, which is no less real, although difficult to enforce. 

Bonds of minor municipalities. — The names, village, bor- 
ough, town, and township, suggest minor political units, having 
less complete powers of government than cities. As with 
county bonds, there is no difference in contemplation of law 
between the bond of a city and the bond of a village, but 
nomenclature is important. Many villages are larger and 
wealthier than some cities, but the bonds of a city may be 
"legal investments" under the laws of a State, while the bonds 
of a village may not be. Village, borough, and town suggest 
small populations, rural communities, low valuations of tax- 
able property, and lack of manufacturing and commerce. 

Bonds of tax districts. — Familiar illustrations of tax dis- 
tricts are irrigation, levee, and drainage districts, and in some 
States, water and sewer districts. While bonds of such dis- 
tricts are not, strictly speaking, assessment bonds, the theory 



PARTICULAR BONDS 157 

upon which taxes are levied and raised is that the property 
included in the district is increased in value by the improve- 
ment and that the increase in value may be taxed to pay the 
bonds issued therefor. The scheme of taxation will be con- 
sidered hereafter in the paragraph devoted to irrigation dis- 
trict bonds. 

Tax districts, whether called irrigation, sewer, drainage, 
or fire districts, are created for one purpose, to provide one 
utility or pay for one project. Hence if the project fails, 
there may be no value to tax, or the collection of taxes may 
be resisted. There is usually no general power of taxation in 
the board or body issuing the bonds and no collateral or other 
means of remedying a default. The district has no indepen- 
dent funds or credit, and if its taxes are not collected, its 
bonds may be and probably will be valueless. 

Purpose of issue. — Considered as to purpose, bonds may 
be divided into those issued to provide more or less self- 
sustaining public utilities, and those issued to acquire prop- 
erty from which there is no direct return to the municipality, 
such as parks and streets. In the first case, the municipality 
secures an income from the operation of the improvement or 
utility. In the second case, taxable valuations are enhanced, 
a decided benefit ensuing from the completion of the improve- 
ment or acquisition of the property. 

Bonds for necessary public purpose. — Water bonds are 
regarded as being issued for an absolutely necessary public 
purpose. Hence we find that, by virtue of constitutional or 
statutory provisions, they enjoy the privilege of being outside 
most debt limits. In addition to being supported by the power 
of direct taxation, a well-managed municipal water works 
system should, and usually does, produce enough revenue by 
way of water rent or meter charge, to pay the operating 
expenses and the interest and principal on the bonds issued 
therefor. As observed in Chapter VIII, this is especially 
true of a system operated by gravity. If the water system is 
operated by pumping, the expense of operation is largely 
increased and the resulting revenue may or may not be large 
enough to take care of debt service. Much also depends 
upon the municipal bookkeeping, which is not always as exact 
as corporate bookkeeping, for the reason that city officials 
like to make as good a showing as possible. Municipal 
operation (not municipal ownership) is by no means free 



158 MUNICIPAL BONDS 

from waste, and municipal bookkeeping does not always tell 
the true story, for obsolescence and wear and tear, as well 
as other items, may not be shown and provided for. 

In computing indebtedness for various purposes, water 
bonds are ordinarily deductible because, the income being suf- 
ficient to take care of debt service, there is no direct tax 
burden upon taxable property. These principles apply to a 
greater or less extent to all public utility issues where there 
is a direct income derived from the utility. Among other 
bonds of this kind may be mentioned those issued to acquire 
markets, wharves, docks, and electric lighting and power sys- 
tems. Public utility bonds of other kinds may or may not 
be regarded as self-liquidating and hence as having an addi- 
tional factor of safety. 

Sewer systems are sometimes made to produce a direct 
operating income. This is very unusual and wherever it is 
observed, it is probable that the charge is made for the pur- 
pose of avoiding a direct tax and thus keeping the bonds out 
of the gross indebtedness. 

Bonds to provide properties and improvements. — Bonds 
to provide properties and improvements which produce no 
direct revenue are those issued to purchase parks and improve 
streets. Such improvements and many others do, however, 
indirectly increase the municipal revenues because they en- 
hance taxable valuations. For example, a house and lot, 
assessed at a valuation of $10,000 produces an annual tax 
return of $250 if the rate is $25 a thousand. The construc- 
tion of a well-paved street, or a sewer may increase the value 
of the property to $15,000, in which case the tax return at 
the same rate is $375 or an increase of $125 a year. Such 
an income economists call service income. 

School district bonds have a great sentimental value in 
this country, where education is regarded as of primary im- 
portance. A school district will not willingly default, for the 
educational needs of a growing population must be met. 
Local pride is not quite the same as good faith, but is a fair 
substitute for it. 

Irrigation, drainage and levee district bonds are issued to 
provide funds for a particular public improvement which, if 
successful, enhances the taxable valuation of the benefited 
property to such an extent that taxation for debt service may 
be lessened, and certainly the increase, if any, should not be 



PARTICULAR BONDS 159 

an appreciable burden. If the improvement is a failure, there 
is, in many cases, not a sufficient increase in taxable valuations 
of property to permit the levy of taxes large enough to pro- 
vide interest and principal. The theory of taxation under 
most statutes governing the issue of bonds of this class, is 
that the improvement, when completed, will increase the tax- 
able valuation of the real property included in the district 
and that this increase may be taxed. This increase, for the 
purpose of illustration, may be from $250,000 to $1,000,000, 
or an increase of $750,000. If the annual charge for main- 
tenance of the project and for debt service is $5,000, the 
annual tax is 6 2/3 per cent of the increase in value. Hence 
if a farm valued at $5,000 is increased in value to the extent 
of $2,500, the additional tax will be $16.35. 

Means of payment. — Classified as to means of payment, 
we have on the one hand the direct obligations of the munici- 
pality, payable from the proceeds of a general ad valorem 
tax on real property, and assessment bonds on the other. For 
a discussion of assessment bonds, the reader is referred to 
Chapter VIII. An additional factor to be noted is uncer- 
tainty of collection of assessments because of lack of clearness 
in the statute authorizing the levy of the assessment. An- 
other factor of uncertainty arises from the difficulty existing 
under the constitutions and statutes of many States, of prov- 
ing that the property has in fact been benefited to the extent 
claimed. Again, if the project is a failure, or only partially 
successful, owners of property alleged to be benefited fre- 
quently make determined efforts to avoid the payment of the 
assessment and such efforts are in many cases successful. 
Prolonged and expensive litigation not infrequently follows 
the issue of assessment bonds. In the eastern States assess- 
ment bonds are usually the direct obligation of the issuing 
cities and stand on no different footing from any other bonds 
as between the city and the bondholder. As between the city 
and the property owner, the latter must pay, but the bond- 
holder need not look directly to the property owner. 

Assessment bonds may not be negotiable instruments, be- 
cause payable from a special fund and hence are not, for 
reasons heretofore given, to be regarded as highly as bonds 
which are negotiable instruments in fact. 

Electoral bonds. — Electoral bonds are only important as 
evidencing popular assent to the issue. No consideration has 



160 MUNICIPAL BONDS 

been given in this book to municipal elections, although in 
many jurisdictions, bonds cannot be issued except after an 
election has been called and held, and a majority of the voters 
have expressed their consent. The author regards elections 
on bond issues as being really limitations on the power to issue 
and as such only justifying consideration in particular cases 
and not justifying extended discussion in a book devoted to 
statements of general principles. As a matter of fact, the 
municipal taxpayers' election is an extremely clumsy expedi- 
ent, intended, it is true, to secure an expression of popular 
opinion, but operating as a limitation of power upon duly 
constituted public officials. The most that can be said of 
elections on bond issues is that they show the attitude of the 
mind of the taxpayer at the time of the election, and hence it 
may be said that electoral bonds indicate popular assent. 



Chapter XVII 
THE ATTORNEYS' FUNCTIONS 

Law defined. — Charles Dickens, in what is probably the 
greatest novel in the English language, and certainly the 
greatest legal novel, says that the great business of the law 
is to make business for itself, and that when viewed thus, it 
is a consistent scheme and not the mere tangle that the laity 
are apt to think it. When Dickens wrote at white heat, de- 
nouncing abuses, as he did in his greater novels, he was not 
always considerate of other people's susceptibilities, and not 
always just. 

Law is in reality nothing but rules of human conduct 
applied to the game which we call life. While it is true that 
lawyers make the rules we call law and apply them in 'prac- 
tice, it must nevertheless be remembered that it is the frailty 
of the human conscience and the human understanding which 
has made rules necessary. It has been well said by Pollock 
that the genius of English law is to make self-help unneces- 
sary. In other words, law aims to throw disputes into the 
courts for an orderly settlement. But it should be borne in 
mind that the best work of lawyers is done outside of the 
courts, and that this work is the most valuable to the client. 

Application of law to municipal financing. — Municipal 
financing, or rather municipal borrowing for capital expendi- 
tures, is of comparatively recent origin. In this country it 
may be said to date from the days of expansion and recon- 
struction following the war between the States. It has taken 
some time and a great deal of experience to produce fair and 
equitable rules by which the game may be played. While we 
cannot say that these rules are settled, they are at least in 
process of becoming definite. Until rules governing the issue 
of municipal securities become firmly established and well 
understood, the intervention of the lawyer, expert in the sub- 
ject, will probably be necessary. 

In view of the fact that municipalities can be sued and 
their contracts are enforceable in the courts, it is very neces- 

161 



162 MUNICIPAL BONDS 

sary to know the legal provisions under which municipal and 
other civil loans are issued, if investments in the securities are 
to -be safe. To be valid obligations, the loans must be issued 
in accordance with these provisions, which may be contained in 
State constitutions, general statutes, or in municipal and local 
ordinances applying directly to the loan. Certain attorneys 
specialize in furnishing opinions on the legality of municipal 
bond issues, and no issue should be placed on the market with- 
out procuring a reliable opinion as to its validity. The pur- 
chaser of bonds should be assured by competent and reliable 
authority that the legal provisions relating to an issue of 
municipal bonds have been fully complied with. 

Questions of legality. — Questions of legality may be prop- 
erly classified as, first: questions as to the power to issue and 
to pay the bonds, and second: questions as to procedure. 

Power to issue and to pay bonds. — The existence of the 
power to issue the bonds and to levy taxes for their payment 
must be determined as a matter of law before issue, for 
estoppel and the protection afforded the innocent holders of 
negotiable paper are of no avail if these powers are lacking. If 
the bonds are infirm in these respects at the time of issue, they 
continue to be infirm, except as legislatures may afford relief. 

Questions as to procedure. — In the second classification, 
we find infirmities of procedure, such as the irregular adop- 
tion or publication of the ordinances authorizing the bonds, 
or failure strictly to comply with statutes requiring par sale 
after public notice. Generally speaking, such defects become 
de minimus as soon as the bonds reach the hands of a holder 
for value without notice. Irregularities of procedure may 
afford ground for a taxpayer's suit to restrain the issue, and 
for this reason may be troublesome. And it is always difficult 
to establish when, as a matter of law, the bonds have reached 
the haven where they are safe from attack. 

Bondholders protected by U. S. Supreme Court. — "In mu- 
nicipal bond cases, the Supreme Court of the United States 
has rejected, when necessary to protect the bona fide holders 
of such securities, narrow and rigid constructions of statutes 
and charters authorizing the creation of such debts. Against 
such holders, it has given no favour to defenses based upon 
mere irregularities in the issue of the bonds or upon non- 
compliance with preliminary requirements, not going to the 



THE ATTORNEYS' FUNCTIONS 163 

question of statutory power to issue them. It has held that 
the Circuit Courts of the United States were clothed with 
full authority, by mandamus or otherwise, to enforce the col- 
lection of judgments rendered therein on such bonds, and that 
this authority could not be interfered with to the injury of 
the creditor, either by the legislature or the judiciary of the 
States. It has upheld and protected the rights of such credi- 
tors with a firm hand, asserting the jurisdiction and authority 
of the Federal courts with such striking energy and vigour as 
apparently, but not actually, to trench upon the lawful rights 
of the States and the acknowledged powers of the State tri- 
bunals. Upon the whole, however, there is little doubt that 
its course has had the approval of the profession in general 
and of the public, and the result ought to teach municipalities 
the lesson that if, having the power conferred upon them, 
they issue negotiable securities, they cannot escape payment if 
these find their way into the hands of innocent purchasers. 
The result, moreover, has been of incalculable value to mu- 
nicipalities in general by establishing upon a firm foundation 
the credit of their securities issued for needed permanent 
improvements, enabling them thereby to obtain money for 
these purposes on a lower interest basis than would otherwise 
have been possible. And for this the country at large is under 
lasting obligations to the wisdom, courage, foresight and 
sense of justice of the Supreme Court of the United States." * 

Questions as to legality. — As most questions in regard to 
legality, which are serious, are questions of power, it has 
become usual for municipalities to retain expert counsel be- 
fore any proceedings are started. The facts are submitted 
and questions of power determined, and problems of proce- 
dure resolved. The specialist will prepare the ordinance and 
necessary resolutions, and will advise the municipality as to 
the procedure to be followed, and when the bonds are to be 
sold, the notice of sale will usually state that an opinion of 
counsel will be furnished without cost to the successful bidder. 
This plan ordinarily results in the purchaser being able to 
obtain the bonds within a very few days after the award, and 
before market conditions have materially changed. 

In commenting upon litigation between a western county 
and a well-known investment banking house, in which case the 

1 Dillon, p. 1402. 



164 MUNICIPAL BONDS 

purchaser's attorneys declined to approve the legality of the 
bonds, and the purchaser was sustained by the courts, the 
editor of the Bond Buyer has recently said: 

"Every one of these cases is a powerful argument in favor 
of approval of bonds by recognized bond attorneys in advance 
of the original sale. The municipality which does not offer 
the purchaser of its bonds the approving opinion of a recog- 
nized bond attorney is taking an entirely unnecessary risk of 
being seriously delayed with its public improvements, or 
worse, financially embarrassed if its loan happened to be for 
the purpose of meeting a maturing obligation. 

"It has been conceded long ago by many large munici- 
palities that the cost of the attorney's opinion is recovered in 
the enhanced price the bonds will bring over the price the 
dealer will bid for bonds not approved in advance, since the 
delay incident to having the legality investigated is, at least, 
equally as disadvantageous to the buyer as it is to the seller." 

When the purchaser retains counsel. — In cases where the 
municipality does not retain counsel, the purchaser must, of 
course, do so. The bid should be conditioned upon the fur- 
nishing to the purchaser of a record of proceedings, showing 
that the bonds have been regularly issued to the satisfaction 
of the purchaser's attorneys. This course entails delay. 
Counsel must be advised of the nature of the issue, make a 
preliminary statutory search, then write a letter calling for 
papers, examine them and probably be obliged to make addi- 
tional requests for information. It is obvious that this course 
must inevitably result in delay, and that the market may fall 
between the time of award and the time the opinion is forth- 
coming. If counsel fails to approve the issue, the bond house 
must pay its lawyers and charge off the fee to its lost-bond 
account. The municipality is quite apt to charge the pur- 
chaser with bad faith, and to intimate that counsel have 
allowed themselves to be influenced by market conditions or 
their clients' desires. This is never so with reputable attor- 
neys, but it is very difficult to substantiate such a denial. The 
courts have, however, said in several cases and we may regard 
it as settled law, that in the absence of a showing of bad faith 
or gross negligence, a bond house will not be compelled to 
take securities which are not legal in the opinion of its coun- 
sel, provided the bid contains the proper condition, that is, 



THE ATTORNEYS' FUNCTIONS 165 

that the legality be evidenced satisfactorily to the purchaser's 
counsel. 

The record of proceedings. — A record of proceedings must 
be obtained in order to enable counsel to form an opinion as 
to legality. This record consists of a large number of papers 
intended to show who are the city's officers, the proceedings 
taken to issue the bonds, and the certificates necessary when 
the transaction is completed. It is much easier to obtain a 
proper record before sale than after it; there is more time 
and there has been less opportunity for bad blood to develop. 
Quite frequently counsel asks for papers, the relevancy of 
which is not apparent to the municipal official who must pre- 
pare them, but as an attorney engaged in this class of prac- 
tice once said, "If I ask for the picture of the city clerk's 
mother-in-law, I want it and I do not want any request for an 
explanation." The point is, that counsel must form an opin- 
ion and express it in writing. He must have facts before him 
on which to predicate an opinion and different attorneys in- 
variably differ as to the proper contents of a record. 

At the end of this chapter is a copy of a "Record Memo- 
randum" showing the papers necessary to form a record of 
proceedings in regard to a typical bond issue. Following that 
is a "Memorandum for Examination of Municipal Bonds," 
which shows the nature of many of the questions which must 
be disposed *of by the skilled specialist. 

The opinion. — It is becoming the practice for counsel to 
give two opinions, one called preliminary and the other final. 

The preliminary opinion means that all essential papers 
have been passed upon, and that when certain additional steps 
are taken, an unqualified approving opinion may be forthcom- 
ing. It concludes as follows: 

Said bonds may be taken up and paid for and we will give our final ap- 
proving opinion when we have examined a form of said bond and are fur- 
nished with formal proof that, 

(a) the signatures upon said bonds are genuine, 

(b) said bonds are taken up and paid for in accordance with the contract 
of sale. 

Yours very truly, 



... 

The final opinion is similar in form to the preliminary 1 
opinion, except that the bonds are described "as" instead of 






166 MUNICIPAL BONDS 

"to be" issued, "are" instead of "will be" binding obligations, 
and is as follows : 



February 8, 1922. 

Hon. William J. Wallin, 

Mayor of the City of Yonkers, 
Yonkers, 

New York. 

Dear Sir: — 

We have examined a record of proceedings relating to nine issues aggre- 
gating $2,312,000 of coupon bonds of the City of Yonkers, a municipal cor- 
poration of the State of New York, dated January 1, 1921, exchangeable at the 
option of the holder for bonds registered as to both principal and interest as 
follows: 

$25,000 Department of Public Works Equipment Bonds, numbered from 
1 to 25 inclusive, maturing $5000 on January 1 in each of the years 1922 to 
1926 inclusive ; 

$300,000 Assessment Bonds, numbered from 26 to 326 inclusive, maturing 
$50,000 on January 1 in each of the years 1922 to 1927 inclusive; 

$14,000 Public Building Bonds, numbered from 326 to 339 inclusive, ma- 
turing $1000 on January 1 in each of the years 1922 to 1935 inclusive; 

$60,000 City Hall Bonds, numbered from 340 to 399 inclusive, maturing 
$3000 on January 1 in each of the years 1922 to 1941 inclusive ; 

$1,070,000 Local Improvement Bonds, numbered from 400 to 1479 inclusive, 
maturing $53,500 on January 1 in each of the years 1922 to 1941 inclusive; 

$154,000 Dock Bonds, numbered from 1480 to 1639 inclusive, maturing 
$7700 on January 1 in each of the years 1922 to 1941 inclusive; 

$460,000 School Bonds, numbered from 1640 to 2099 inclusive, maturing 
$23,000 on January 1 in each of the years 1922 to 1941 inclusive; 

$149,000 Grade Crossing Elimination Bonds, numbered from 2100 to 2259 
inclusive, maturing $7450 on January 1 in each of the years 1922 to 1941 
inclusive ; 

$80,000 Water Bonds, numbered from 2260 to 2339 inclusive, maturing 
$2000 on January 1 in each of the years 1922 to 1961 inclusive; 

All of said bonds bearing interest at the rate of five and one-half per 
centum (5y 2 %) per annum, payable semi-annually on April 1 and October 1 in 
each year and at maturity, issued pursuant to the Second Class Cities Law 
and Chapter 452 of the Laws of 1908 as amended, and in the case of the Grade 
Crossing Elimination Bonds pursuant to the Railroad Law, and in the case of 
the School Bonds pursuant to the Education Law of the State of New York, 
and pursuant to ordinances of the City of Yonkers, approved December 29, 
1920, and in our opinion said bonds are binding and legal obligations of the 
said City. 

We have examined bonds No. 1, 26, 326, 340, 400, 1480, 1640, 2100 and 
2260 of said issues and in our opinion the forms of said bonds and their 
execution are regular and proper. 

Yours very truly, 



THE ATTORNEYS' FUNCTIONS 167 

Such an opinion means just what it says, namely, that the 
bonds are binding and legal obligations of the municipality. 
Legal or legality means something more than the mere for- 
mality of issue; it means the expression of a perfect obliga- 
tion; it means that the security of the obligation and the 
means of payment are such that the buyer need have no con- 
cern about his income and investment. Among other things, 
it means that the power to issue the bonds exists, that they 
are within every statutory and constitutional limitation of 
indebtedness, that every step required to be taken has been 
taken in due time, form and manner, and that sufficient tax 
may be levied to provide funds to pay the bonds. 

Qualified opinions. — It is occasionally necessary to give 
qualified opinions. This necessity arises because there is a 
limitation upon the taxing power, and sometimes because 
there has been a failure of procedure. A characteristic quali- 
fication where there is a limited tax is the following: 

In addition to the tax of % of 1 per cent for general purposes, the city is 
authorized to levy an additional tax not exceeding % of 1 per cent per annum 
upon the value of the taxable property therein to be devoted to the payment of 
its public debt and the interest thereon and to the maintenance aof its public 
schools and public conveniences. 

A limitation expressing a failure fully to comply with the 
statutory requirements is contained in the latter part of an 
opinion : 

Notwithstanding that the right to attack the validity of said bonds has 
not been cut off, as provided by the statutes of New Jersey, the said bonds are 
in our opinion binding and legal obligations of said Township. 

As an example of an opinion intended clearly to express 
the true character of the bonds, the following is of interest: 

In our opinion, said bonds will be binding and legal obligations of the 
Town of Mamaroneck, payable in the first instance from assessments and not 
from a general town tax, which, however, can be levied if there is a shortage 
in the primary fund. 

When a qualified opinion is merchantable. — It is quite un- 
usual for a qualified opinion to be merchantable, though occa- 
sionally such an opinion may be used. The investment bank- 
ing houses require unqualified opinions. 

Whether an opinion is merchantable or not depends 
largely upon whose opinion it is; the attorney must be gen- 



168 MUNICIPAL BONDS 

erally recognized as a specialist and expert before his opinion 
will pass current. It is, of course, true that opinions of cer- 
tain attorneys are merchantable in some parts of the county 
and not so in others, and some attorneys will approve certain 
classes of securities which others will not approve. An opin- 
ion by counsel whose name is well-known presumably makes 
it easier for the purchaser to sell the bonds and the sophis- 
ticated purchaser demands such an opinion. 

"One of the strongest influences making for the present 
admirable credit of American municipalities has been the 
scrupulous care with which all questions affecting legality 
have been considered. To attempt an estimate of the pro- 
portion of all loans that have been put out with sufficient 
irregularity to cause correction by attorneys before acceptance, 
would occasion unnecessary alarm. The bond attorney stands 
between the taxpayer and the investor, protecting each against 
the other, and working in the interest of both for a still higher 
development of municipal bond law and bond practice. His 
work is now so well done, and so systematically, that we 
rightly take it as a matter of course, and give ourselves, as 
individual buyers, in dealing with bond issues of recent years, 
to other considerations than those connected with validity." 2 

2 Chamberlain, p. 234. 



THE ATTORNEYS' FUNCTIONS 169 

Form of Record Memorandum 
NEW JERSEY PERMANENT SERIAL BONDS 

(FOR OTHER THAN SCHOOL PURPOSES) 

RECORD MEMORANDUM 

Prepared for the assistance of clients by 

HAWKINS, DELAFIELD & LONGFELLOW, 

Attorneys at Law, 

20 Exchange Place, 

New York City, 

March 1, 1921. 

This memorandum is intended to be helpful in the preparation of a rec- 
ord of proceedings upon which an opinion approving bonds can be based. 
The proof referred to is not necessarily complete, and it should be under- 
stood that it is generally necessary after examining such proof to ask for 
additional papers. 

As a preliminary matter and for the purpose of determining the maturities 
of the bonds and the character of the ordinance to authorize them, the follow- 
ing information should be furnished, and, if the bonds are for several pur- 
poses, this information should be put in tabular form: 

(a) A description of each improvement made or property acquired, that is, 
its kind and location, which description should be sufficiently definite to enable 
its classification to be determined within the definition of the Pierson Bond Act. 
(Sec. 4, (2) as amended 1917, Chap. 24.0, p.804.) 

(b) The date when the improvement was completed or the property ac- 
quired. (Pierson Bond Act, Sec. 4 (3), as amended 1917, Chap. 240, p. 806.) 

(c) The amount of the cost to be paid by the municipality at large. 

(d) The date the last installment of the assessment is payable. (Pierson 
Bond Act, Sec. 2 (/) (a), as amended 1917, Chap. 240, p. 804.) 

(e) The amount of uncollected assessments. 
(/) The total cost of the improvement. 

(g) Amount of temporary notes or bonds outstanding. 
If there are no assessment improvements involved, items (c), (d) and (e) 
should be omitted. 

The following are the papers to be included in the record of proceedings: 

1. A certificate by the Clerk covering the following matters: 

(a) The names and dates of election or appointment and dates of com- 
mencement and end of the term of office of the members of the governing body, 
the chief financial official (stating the name of his office), the Clerk, the Treas- 
urer, and of. the other officials, if any, who will execute the proposed bonds. 

(b) An extract from the rules of order or resolution of the governing 
body which fixes the times for its^regular meetings. If this cannot be furnished, 
the times at which the regular meetings are held should be stated. 

(c) If the municipality is governed by the Walsh Act, a statement that at 
an election held on a certain date, stating the date, a majority of the legal 
voters assented to an Act of the Legislature of the State of New Jersey entitled: 
"An act relating to regulating and providing for, the government of cities, 
towns, townships, boroughs, villages, and municipalities governed by board of 



170 MUNICIPAL BONDS 

commissioners or improvement commissions in this State," approved April 25, 
1911, by the following vote: 

For the adoption (state vote) 
Against the adoption (state vote) 

{Walsh Act, Sec. l8, as amended by P. L. 191 5, p. 12.) 

Also a statement, if it be the fact, that no election in the municipality has 
been held on the question of whether it shall abandon its organization under 
the said act {Walsh Act, Section 19 as amended by P. L. 1917, p. 146) and 
that the municipality is organized and acting thereunder. 

{d) If the municipality is not governed by the Walsh Act a reference to 
the act which prescribes its form of government. If the city is acting under a 
referendum act proof of its adoption must be furnished. 

{e) A statement of the corporate name of the municipality, and if it be 
the case, a statement that the corporate name of the municipality has not been 
changed by any election or shortened by any resolution. If the corporate name 
has been changed by an election, a copy of the minutes recording the results 
of the election should be set forth. {Act Concerning Municipalities, Art. II, 
P. L. 1917, p. 320). If the corporate name of the city has been shortened, a 
copy of the resolution of the governing body relating thereto should be set 
forth. {Act Concerning Municipalities, Art. Ill, P. L. 1917, p. 321.) 

(/) A statement of the official newspaper or newspapers of the munici- 
pality. {Act Concerning Municipalities, Art. XXXVII, Sec. 4, P. L. 1917, 
p. 456.) 

2. If the corporate name of the municipality has been changed by an 
election, a copy of the minutes recording such election as filed in the office of 
the Clerk of the County certified by such Clerk, and also a copy as filed in the 
office of the Secretary of State of New Jersey certified by the Secretary of 
State. {Act Concerning Municipalities, Art. II, Sec. 2, P. L. 1917, p. 320.) 

If the corporate title of the municipality has been shortened, a copy of the 
resolution shortening the same, as filed in the office of the Secretary of State 
of New Jersey certified by the Secretary of State. {Act Concerning Municipali- 
ties, Art. Ill, P. L. 19 17, p. 321.) 

3. Certified copies of the ordinances authorizing the improvements for 
which the bonds are to be issued. 

4. A copy of the last annual debt statement of the municipality filed in the 
office of the Clerk, certified by the Clerk as a true copy of the annual debt 
statement filed in his office and stating the date of filing. {Subd'vv. 1, Sec. 12, 
Pier son Bond Act, Chap. 252, P. L. 1916, p. 525, as amended by Chap 108, 
P. L. 1920, p. 235.) 

5. A copy of the supplemental debt statement of the municipality, made in 
connection with this issue filed in the office of the Clerk, certified as stated in 
the preceding paragraph. {Pier son Bond Act, P. L. 1916, Chap. 252, Sec. 12 {2), 
p. 525, as amended by Chap. 108, P. L. 1920, p. 235.) 

Although this certificate is all that is necessary for the record of pro- 
ceedings, it is advisable and customary to prepare and publish a financial state- 
ment showing the debts of the municipality in such form that purchasers can 
tell whether the bonds are legal investments for savings banks. 

6. Affidavit or affidavits of the person or persons having knowledge of the 
facts, stating the position held by such person and that as such he knows the 
facts, and stating either (a) if the bonds are not assessment bonds, character 
of the improvement of property and the dates of completion of the improve- 



THE ATTORNEYS' FUNCTIONS 171 

ments and dates of acquisition of the properties for which the bonds are to be 
issued. (Pierson Bond Act, Sec. 4 (j), as amended 1917, Chap. 24.0, p. 804.), 
or (b) if the bonds are assessment bonds, the date when the last installment of 
assessments will be payable. {Pierson Bond Act, Sec. 2 {1) {a), as amended 
1917, Chap. 240, p. 804.) This is for the purpose of determining the maturity 
of the bonds. 

7. Extracts, certified by the Clerk, from the Minutes of the meetings of 
the governing body, at which the said ordinance was introduced and finally 
passed. 

8. An affidavit, or affidavits, made by the manager or publisher of the 
newspaper or newspapers, in which the ordinance was published prior to final 
passage. Each of these should state the place where the newspaper is printed, 
published and circulated, and the date of publication, and should have a clip- 
ping attached showing the ordinance as published. 

The publication must be at least two days before final passage. After the 
ordinance should appear the following: 

Notice. 

The (state name of governing body,) of the (state name of munici- 
pality,) will consider the final passage of the foregoing ordinance at a 
meeting to be held on , 19 , at o'clock 

M., at in the said (city, borough, etc.). 



Clerk. 

{Act Concerning Municipalities, Art. X, Sec. 1, as amended by P. L. 1918, 
p. 479; also Chap. 188, P. L. 1919, p. 418, as amended by P. L. 192 1, p. 854.) 

9. An extract, certified by the Clerk, from the minutes of the meeting of 
the governing body at which the ordinance authorizing the bonds was finally 
passed. 

10. A copy, certified by the Clerk, of the ordinance authorizing the bonds. 

11. Affidavits of publication, similar to those described in paragraph 8 
showing the publication of the ordinance after final passage. 

After the ordinance must appear the words: 
Attest: 



Clerk. 
The following must then follow: 

Statement. 
The foregoing ordinance was adopted on the day of 

,19 • 

The bonds authorized thereby will be issued and delivered after the 

day of , 19 , (specifying 

a day not less than twenty days after the first publication) and any suit, 

action or proceeding to set aside or vacate this ordinance must be begun 

within twenty days after the publication of this statement. 



Clerk. 



172 MUNICIPAL BONDS 

In the case of a borough or township there must be added to the state- 
ment: 

"Such bonds will not be issued if protests against the same are filed 
under Section Nine, Chapter 252, P. L. 1916, as amended, unless a propo- 
sition for the issuance thereof shall be adopted at an election under said 
section." 



Borough {or township) Clerk. 
{Pier son Bond Act, Sec. 2 {i) {2), as amended 1917, Chap. 240, p. 805.) 

12. A copy, certified by the Clerk, of a certificate made by him and filed 
in his office showing that there has been no protest against the ordinance, or, 
in the case of a borough or township, against the issuance of the bonds, and no 
demand for a referendum. {Act Concerning Municipalities, Art. XXXVII, 
Sec. 24, P. L. 1917, p. 461, Walsh Act, Sec. 17, as amended by P. L. 1913, 
p. 32s and in a borough or township, Pier son Bond Act, Sec. 9, 1916, Chap. 
2 5 2 > P- 534-) This certificate should not be made and filed until more than ten 
days after the publication of the ordinance after final passage. 

13. An extract, certified by the Clerk, from the minutes of the meeting of 
the governing body at which the resolution was adopted providing for the 
form of the bonds and for their sale. {Pierson Bond Act, Sec. 6, as amended 
1920, Chap. 252, p. 469.) This resolution may be adopted at the time of the 
final passage of the ordinance authorizing the bonds or at any time thereafter, 
but the date of sale cannot be within ten days after the publication of the ordi- 
nance after final passage. 

14. Affidavits of publication, similar to those described in paragraph 8, 
showing the publication of the notice of sale. The law requires at least ten 
days' notice of sale published once in the local paper and once in a financial 
paper published in New York City or Philadelphia. {Pierson Bond Act, 
Sec. 6, as amended 1920, Chap. 252, p. 469, and also I9I9, Chap. 188, p. 418.) 

15. An extract, certified by the Clerk, from the minutes of the meeting at 
which the resolution is adopted, awarding the bonds. The minutes should 
contain a table of the bids received. 

The bonds cannot be awarded within ten days after the publication after 
final passage of the ordinance authorizing the bonds, because such ordinance 
does not until then become operative. {Act Concerning Municipalities, Art. 
XXVII, Sec. 24, Chap. 152, P. L. 19 17, p. 261.) 

16. A certificate of the municipal attorney that there is no litigation pend- 
ing or threatened affecting the bonds. This cannot be made until after the 
twenty-day period has expired within which litigation can be begun. 

After the examination of a record of proceedings containing the proof 
above described, and such additional proof as may be required in any par- 
ticular case, a preliminary opinion is given. The bonds can then be taken up 
and paid for and a final opinion will be given on further proof, consisting of: 

17. A certificate by the Treasurer showing the delivery of the bonds and 
payment for them. 

18. A certificate identifying the signatures on the bonds as the signatures 
of the proper officials, made by an officer of a bank; and 

19. An examination of an executed bond. 



THE ATTORNEYS' FUNCTIONS 173 



Additional Matters. 

20. In case any meetings of the governing body are special meetings at 
which not all the members are present, the record should include proof that 
each absent member actually received notice of the time, place and object of 
the meeting. Such proof may be by affidavit of the person who served the 
notice or by the affidavit of such absent members that they received the notice. 
The form of notice should be attached. Proof that notice was mailed, without 
proof that it was received, is not sufficient. 

21. All certificates should be dated and those made by the Clerk should 
have the municipal seal affixed. 

22. It is suggested that extracts from the minutes of the governing body 
be certified by a certificate in substantially the following form: 



Clerk's Certificate. 

I, , Clerk of the (state name of mu- 

nicipality), New Jersey, Do Hereby Certify that 

The annexed extract from the minutes of a meeting of the (state name 
of governing body) of the (state name of municipality), held on 

, 19 , has been compared by me with the original 
and it is a correct transcript therefrom and of the whole of the original so 
far as the same relates to the matters therein referred to. 



This paragraph 
is for use by a 
Walsh Act mu- 
nicipality only. 
(Walsh Act, Sec. 
3, P. L. 1912, p. 
644.) 



The resolution (or ordinance) referred to therein 
was reduced to writing and read before the vote was 
taken thereon, and the vote was taken by yeas and nays 
and entered in the minutes and the minutes of said 
meeting so recorded were signed by 

being a majority of all the Commissioners 
and by the undersigned Clerk. 



In Witness Whereof, I have hereunto set my hand and affixed the 
seal of said (city, borough, etc.) this day of 

, 19 . 



Clerk. 

23. It is suggested that ordinances be certified by a certificate in substan- 
tially the following form: 



Clerk's Certificate. 

I, , Clerk of the (state name of munici- 

pality), Do Hereby Certify that 

The annexed copy of an ordinance finally adopted at a meeting of 
the (state name of governing body) of the (state name of municipality), 
held on , 19 , has been compared by me with 

the original and it is a correct transcript therefrom and of the whole of 
the original. 



174 



MUNICIPAL BONDS 



This paragraph 
is for use by a 
Walsh Act mu- 
nicipality only.^ 
(Walsh Act, Sees. 
3 and 6, P. L. 1912, 
pp. 664 and 649.) 



Said ordinance was introduced at a meeting of said 
Board held on , 19 , and 

was finally adopted on , 19 . It was 

complete in the form in which it was finally passed and 
remained on file with the undersigned clerk for public 
inspection from the date of introduction, to the date of 
adoption, being at least two weeks before the final pas- 
sage or adoption thereof. Said ordinance was recorded 
and was on , 19 , signed in the 

book in which it is recorded by the Commissioners whose 
names appear on the annexed copy, being a majority of 
all the Commissioners. 



In Witness Whereof, I have hereunto set my hand and affixed the 
seal of said (city, borough, etc.), this day of 

. 19 . 



Clerk. 



24. Extracts from minutes should include the statement of whether the 
meeting is regular or special, its date, the place where it is held, and the per- 
sons present and absent, and the vote for and against each question and the 
names of those voting aye and nay. 

25. The examination of the record of proceedings will be facilitated if, 
so far as possible, papers are typewritten on standard size legal paper (8x13 
inches). Sufficient space should be left at the top for binding. Affidavits of 
publication and other papers of a different size should be attached to standard 
size paper. 

26. Papers referred to in separate numbered paragraphs of this memo- 
randum should not be combined or bound together, in order that they may be 
arranged in the most convenient order. 



Memorandum for Examination of Municipal Bonds 

A. 
CONSTITUTIONALITY OF ENABLING ACT. 

1. Does title express subject of act. 

2. Does act embrace more than one subject, if that is prohibited. 

3. Is it special legislation, if prohibited. 

4. Does it unconstitutionally delegate legislative power. 

5. Is it repugnant to other constitutional provisions. 

6. *Was it adopted and approved as required by the constitution. 

a. Introduction and separate readings. 

b. Amendments during passage. 

c. Ayes and nays — Required number voting. 

d. Approval by Executive. 

e. Acceptance by municipality. 

f. If act special or local, was notice of application given, if required. 



THE ATTORNEYS' FUNCTIONS 175 

Note: *(A) In some states it is necessary to get proof of proper passage and 
approval. In other states, regularity of passage and approval is con- 
clusively presumed by official promulgation. 

(B) If statute is contained in legislative revision, it may be relied 
upon; but if in mere codification or compilation, original session laws must 
be examined. 

B. 

DEBT LIMITATIONS. 

7. Are there any constitutional or general statutory limitations of indebted- 
ness; if so, has the margin of debt-incurring capacity been exceeded. 

a. Total debt, including this issue. 

b. Deductions which may be made to ascertain net debt. 

c. If necessary, include debt of other municipalities covering in whole 
or in part same territory. 

d. What is assessed valuation, or population, or other facts upon which 
limitations depend. 

Note: In New York see that assessed valuation of cities is as equalized by 
County Board. 



INCORPORATION. 

8. Is municipality duly incorporated. 

a. By special act. 

b. By proceedings under general act. 

c. Have general governmental referendum acts been accepted. 

d. Is there a time limit on corporate existence. 



D. 
POWER TO ISSUE. 

9. Does act relied upon confer authority to issue bonds as proposed. 

10. Does act confer power to issue bonds for particular purpose or only 
generally for any municipal purpose; if latter, is purpose specifically pro- 
vided for in any act or necessarily implied. 

11. Does it confer power to issue bonds of the maturities and interest rate 
proposed. 

12. Does it contain any limitation as to amount, either fixed or percentage of 
assessed valuation, or amount per capita or otherwise, or amount which 
may be issued in any year. 

13. Will bonds be general obligations of municipality. 

14. Does act contain adequate taxing power, or are there tax limitations which 
affect the principal or interest of bonds. 

15. Are bonds limited to actual cost or expense; if so what may be included 
in cost or expense. 



176 MUNICIPAL BONDS 



E. 
ACTION BY ELECTORS. 

If authorization by voters required: 

16. Has all action required of bodies or officers preliminary to and directing 
the election been taken. 

a. Is action required to be by resolution or ordinance. 

b. Was action taken at regular, stated, or special meetings. 

c. If special, was meeting duly called. 

d. Was a quorum present. 

e. Introduction, readings and passage at separate meetings. 

f. Did required number vote. 

g. Approval by Mayor or Chief Executive, or passage over veto, 
h. Was ordinance or resolution recorded, if required. 

i. Was ordinance or resolution published, if required. 

j. Was any protest filed which would prevent calling election. 

17. Is form of notice of election proper, and does it conform to preliminary 
proceedings. 

a. Statement of purpose of appropriation or bonds, and any details as 
to purpose or terms of bonds. 

b. Date of election. 

c. Place or places. 

d. Description of election districts, if required. 

e. Hours. 

f. Qualification of voters. 

g. Signed by proper officers. 

18. Was it posted and published, if both are required, in requisite manner, 
and for requisite periods and times. Were newspapers official if required. 

19. Regularity of registration of voters, if necessary to be inquired into. 

20. Was ballot, and proposition thereon, sufficient in form and substance. 

a. Did the proposition fully state the matters required to be voted upon 
in accordance with statute and preliminary proceedings. 

b. Did it combine two or more purposes, if prohibited. 

c. Was it official if required. 

21. Was the canvass of the result of the election properly made, and was the 
result of the election determined by the required officer or body, and does 
the result of the election show the requisite affirmative vote. 



F. 

ACTION BY GOVERNING BODY. 

22. Are all proceedings subsequent to vote, or, where no vote is required, all 
proceedings of bodies or officers duly adopted and proper in form and sub- 
stance. 

a. Is a resolution or ordinance required. 

b. Was each ordinance or resolution properly introduced, read required 
times, and finally passed, on separate days, and at stated or regular 
meetings, if required, or, if at special meeting, was it duly called. 

C. Was quorum present at each step and was requisite vote obtained at 
each step by ayes and nays if required.* 



THE ATTORNEYS' FUNCTIONS 111 

d. Was ordinance or resolution approved by Executive or passed over 
veto. 

e. Was it recorded. 

f. Was it duly published. 

g. Was it duly posted. 

23. Was resolution or ordinance in proper form as to title and enacting clause. 

24. Does authorizing ordinance or resolution contain complete authority for, 
and details as to purpose and bonds, conforming to the statute and pre- 
vious proceedings, including proper tax or sinking fund provision.* 

25. Has form of bond been adopted. 

♦Note: General Municipal Law, New York, Sec. 5, requires two-thirds vote 
and statement of purpose and provision for taxes to pay principal and 
interest. 



G. 

CONSENTS OF OTHER BOARDS OR BODIES. 

26. Have all consents or action by Boards, other than authorizing body, been 
obtained, such as State Boards in New York as to water, sewerage, light- 
ing, etc.; Congress or Secretary of War as to bridges over navigable 
streams. 



H. 

SALE. 

27. If public sale required. 

a. Has proper notice, by publication or posting, been given, and does 
offering conform to previous proceedings. 

b. Was notice given pursuant to proper direction. 

c. Was it necessary to offer bonds first to any sinking fund or other 
board. 



I. 

AWARD. 

28. Have bonds been duly awarded by the proper authority. 

a. Does bid conform to notice of sale, if any required or given, at more 
than par and interest or if at less than par is this permissible. 

b. To highest bidder, or person bidding lowest rate, if required. 



J. 
PAYMENT. 

29. Were bonds properly paid for. 

a. Did municipality receive par, premium and accrued interest. 



178 MUNICIPAL BONDS 

K. 
FORM OF PROOF. 

30. Are proofs in proper form. 

a. Are all records properly certified. 

b. Are all affidavits in proper form. 

c. Are officials making certificates or affidavits proper officers having 
charge of records or peculiar knowledge of facts. 

d. Are records properly certified. 

e. Are affidavits of publication originals, and do they show exact dates 
of publication, with clipping attached. 



FORM OF BOND. 

31. Is form of bond correct. 

a. Proper designation of bond, when statute provides therefor. 

b. Proper name of obligor. 

c. Proper name of obligee, if registered. 

d. Date. 

e. Dates of maturity. 

f. Principal amount. 

g. Principal where payable, 
h. Interest rate. 

i. Dates of payment of interest. 

j. Interest where payable. 

k. Medium in which principal and interest payable. 

1. Correct recital of authorizing resolution and vote of electors if re- 
quired. 

m. Correct recital of statutory authority. 

n. Correct statutory form of recital giving conclusive presumption of 
legality, if authorized. 

o. General recital. 

p. Signed by proper officers. 

q. Sealed with proper seal. 

r. Were officers signing in office at time of actual delivery and payment. 

s. Are provisions for registration and transfer, conversion or exchange, 
proper, including endorsement. 

t. If coupon, is the form and amount of the coupon correct, and prop- 
erly authenticated. 

M. 

MISCELLANEOUS. 

32. Do proofs show election and qualification, of all officers acting in the 
authorization and issuance of the bonds (especially those signing). 

33. Where referendum act is relied upon for authority or procedure, get 
complete proof of acceptance. 

34. Where statute permits referendum on acts of municipal bodies, or permits 
recall or officers see that no referendum or recall was had; or, if any, the 
result. 



THE ATTORNEYS' FUNCTIONS 179 

35. Where any proceeding in connection with the bonds is to be initiated by 
petition, is petition adequately signed; if by owners of real estate eliminate 
executors, and if necessary get special proof as to corporations, trustees, 
partners and cases other than individuals. 

36. If statutes prohibit elections within particular periods or within period 
after previous election, see that vote was not within such period, as in 
N. Y. Village Law or Penn. Genl. Indebtedness Statute. 

37. In New York cities proof that certificate has been filed under Home Rule 
Law (L. 1913, ch. 247). 

N. 

LITIGATION. 

38. Have bonds been judicially passed upon or is any litigation pending or 
threatened. 

O. 

39. REFUNDING BONDS. 

a. Was issue to be refunded, legally issued if that must be investigated. 

b. Are bonds to be refunded outstanding and are there funds applicable 
to their payment. 

c. Were old bonds duly paid for. 

d. Has there been any litigation on old bonds. 

e. Where statutes restrict refunding to bonds not declared invalid, offi- 
cial court searches must be secured. 

f. Can proceeds exceed principal or fixed proportion of old bonds. 



P. 

FUNDING BONDS. 



40. 



Can they be issued to realize more than principal of existing debt or any 
part thereof. 



Chapter XVIII 
PRACTICAL SUGGESTIONS 

The rules of the game. — The municipal bond game is an 
extremely interesting pastime. Like bridge-whist or poker, 
the latter of which to some extent it resembles, it is played 
according to a number of rules, most of which are prescribed 
by higher authority, but a few are made by the players them- 
selves. Certain consequences follow from the application of 
these rules. Custom decides how certain things shall be done, 
and experience shows that if the rules are followed, better 
results are obtained than if the rules, or some of them, are 
ignored. It is the purpose of this concluding chapter to draw 
deductions from experience and state the deductions as sug- 
gestions to municipal officials. 

Publicity. — Advertise your bonds for sale in the financial 
newspapers which circulate in the locality from which you 
expect bids. There are no better mediums for general pur- 
poses than the Daily Bond Buyer and the Commercial and 
Financial Chronicle of New York. Both of these papers 
reach every bond house of consequence in the United States. 
If you give your proposed sale sufficient publicity, you will, 
certainly in normal times and probably in most times, have no 
difficulty in securing bids which you can accept. Do not rely 
upon advertising in local newspapers which do not reach the 
bond dealers, or connive to shut out bids by doing the least 
permissible amount of advertising. 

The following is a list of financial publications and the 
territories in which they circulate. This list is not intended 
to be inclusive, but it is believed that it is representative. 

The Bond Buyer (New York, N. Y.) 

This publication (issued daily and weekly) is the techni- 
cal organ of the municipal bond business, being devoted exclu- 
sively to this one class of securities. It is the paper usually 
selected by municipalities in which to publish bond sale no- 
tices, bond calls, etc. Municipal bond dealers, banks operat- 

X80 



PRACTICAL SUGGESTIONS 181 

ing bond departments and important investors in municipal 
issues depend mainly upon the Bond Buyer for information 
relating to new State, city and other municipal bond issues. 
Circulation is national. 

The Commercial and Financial Chronicle (New York, N. Y.) 
The Chronicle is the standard weekly financial journal of 
the United States and is found in the offices of bankers, 
brokers and financial institutions, and is quite widely read by 
investors. It has a "State and City Department" in which is 
published news of current municipal finance. Circulation is 
national. 

The Wall Street Journal (New York, N. Y.) 

This is the leading financial daily, and enjoys a wide cir-, 
culation among bankers, brokers, investors, etc. Banking 
and corporation news and the stock, bond and money mar- 
kets are carefully covered. Circulation is national. 

Boston News Bureau (Boston, Mass.) 

In New England, the Boston News Bureau virtually du- 
plicates the Wall Street Journal. These two publications are 
closely allied. 

The Manufacturers Record (Baltimore, Md.) 

This paper is the leading trade journal of the South. 
Departments are devoted to construction and financial news, 
in which considerable attention is given to public improvement 
work and public finance. Carries a considerable number of 
official notices of Southern municipal bond offerings. Circula- 
tion is national. 

The Economist (Chicago, 111.) 

The leading financial weekly of the Middle West. De- 
voted to general financial and real estate news. Local circu- 
lation. 

The Commercial West (Minneapolis, Minn.) 

Financial weekly of the twin cities district. Devotes about 
a page to municipal finance in its own district. Carries some 
local municipal bond advertising. 

The Coast Banker (San Francisco, Cal.) 

Leading banking and financial paper of the Pacific Coast. 
Circulation local. Issued monthly. 



182 MUNICIPAL BONDS 

Pacific Banker (Portland, Ore.) 

A banking and investment weekly covering Oregon, Wash- 
ington, and vicinity. Reaches local municipal bond dealers. 

Another means of advertising. — United States Mortgage 
and Trust Company of New York City offers a very valuable 
service for a reasonable charge. It will prepare and mail to 
a selected list of dealers a circular describing the bonds of- 
fered for sale, together with a financial statement (prepared 
from information furnished by the municipal officials), and 
form for bids or proposals. 

Preparation of bonds. — The necessary precautions against 
forgery and fraud which should surround the issuance of mu- 
nicipal securities, have not always been exercised. Cheaply 
printed blanks of poor quality are frequently used and the 
preparation is not subject to the expert supervision under 
which all bonds should be issued. 

The possibility of forgery. — The first of the year 1919 
brought to light the methods by which M. H. Cutter of 
Chicago had forged bonds of a half dozen cities and towns, 
the issues involved amounting to about $600,000. His own 
firm bought and attended to the engraving of the bonds, thus 
removing the check against overissue and enabling Cutter to 
forge the bogus bonds and manipulate all of the various is- 
sues at will. The serious losses resulting recalled the Quig- 
ley and Prior forgeries of preceding decades. 

The lack of precaution on the part of many municipalities 
in the issuance of their securities is disquieting, especially 
when it is considered that such obligations form a substantial 
part of the investments of executors, trustees, insurance com- 
panies, and banks. For a municipality to sacrifice the neces- 
sary safeguards in the issuance of securities by any reduction 
in expense and thereby diminish the actual value of the 
security to the dealer and to the investor, is to obtain their 
preparation at a correspondingly high cost of risk. 

How fraud may be avoided. — Have your bonds printed 
and prepared by a responsible banknote company, and deal 
direct with the printers. The preparation of coupon bonds 
requires a high degree of skill and experience, both being neces- 
sary if annoying and costly mistakes are to be avoided. The finan- 
cial newspapers will furnish names and addresses of the bank- 
note companies, which alone are competent to do such work. 



PRACTICAL SUGGESTIONS 183 

United States Mortgage and Trust Company, the deposi- 
tary of the Investment Bankers Association, will prepare 
bonds on its own specially water-marked paper, attend to the 
execution of the bonds, and guarantee the genuineness of the 
signatures of the municipal officials and the seal impressed 
thereon, at prices only slightly above those for which the 
same bonds could be secured elsewhere. A similar service is 
offered by Security Bank Note Company of Philadelphia and 
Chemical Bank Note Company of Rutherford, New Jersey. 
Bonds so prepared and certified are somewhat more attrac- 
tive to dealers than bonds not so prepared and certified, and 
probably bring a better price. 

Contracts for the preparation of bonds made with other 
than banknote companies may be unduly expensive because an 
agent's profit is included in the price. Even if you are offered 
a contract calling for the payment of $500 for the prepara- 
tion of a small issue of bonds, do not sign it. In one instance 
which came to the writer's attention, a contract of this kind 
was made and broken when it was found that the bonds could 
be prepared for $80. 

Side agreements. — It is inadvisable to make private con- 
tracts for the sale of bonds, or to enter into deposit, fiscal 
agent or proceedings contracts, for the reasons which appear 
in Chapter IX. It is ordinarily unnecessary to make con- 
tracts of this kind, and it is in connection with such contracts 
that unpleasant incidents arise. 

In dealing with bond houses and bond men, it should be 
borne in mind that the representatives of the better class of 
bond houses are very highly trained men. These men are 
ethical and fair in their dealings with municipal officials, but 
the municipal official is at a disadvantage in dealing with 
them. The American theory of government is that any per- 
son elected to public office is fully competent to perform the 
duties of that office. As a matter of fact, the average munici- 
pal official is not a match for the skilled bond buyer. 

Place of payment. — It is an advantage to the municipality 
to contract to pay interest and principal of bonds at a New 
York bank or a par point, that is, a city in which the banks 
are not charged with exchange for the collection of checks. 
Local banks like the business and the advertising which fol- 
low the deposit of funds in advance of and to meet such pay- 
ments, and the naming of the bank in the bond and coupons 



184 MUNICIPAL BONDS 

as the designated place of payment. But bonds payable in 
New York or at a par point bring a better price. 

Promptness in payment. — Have funds on hand in the 
designated bank for the payment of interest and principal be- 
fore either are due. This will preserve your credit and save 
you a great deal of annoyance. It may seem a small thing to 
delay for a few days the payment of semi-annual interest 
coupons, but it is a cause of alarm to your bondholder. If 
coupons are presented and no funds are available, they will 
be returned through the usual channels to the bank with 
which deposited, and by that bank to the depositor. Even if 
the depositor is subsequently advised that the coupons will be 
paid, the process of collection must be again put into motion. 

Employment of counsel. — When a bond issue is contem- 
plated, it should be remembered that sooner or later the pro- 
ceedings will be passed upon by counsel generally recognized 
to be specialists in the examination of such proceedings. 

Until recent years, it was the practice for the purchaser 
to select his own attorney, but within the last decade the prac- 
tice has become well established, at least in the Eastern States, 
for the municipality to retain expert counsel in the first in- 
stance and have him conduct all of the proceedings in con- 
nection with the bond issue, and give his final approving opin- 
ion when the bonds are delivered. This does not imply any 
reflection upon the city's own counsel. The smaller munici- 
pality issues bonds at infrequent intervals, and political 
changes are sufficiently rapid so that the corporation counsel 
may have occasion to conduct no proceedings for the issue of 
bonds. The specialists are willing to work with local coun- 
sel, and in fact prefer doing so. If the city retains the expert, 
it is of course responsible for his fee, but the amount of the 
fee is included in the higher price received for the bonds when 
sold. If the bidder knows that he must retain his own attor- 
ney, he will make an allowance for the fee in submitting his 
bid. If he does not have to meet this item of expense, his bid 
will be higher. 

Modern practice requires the municipality to furnish an 
acceptable, that is a merchantable, legal opinion with its 
bonds, and dealers understand that their money, time, and 
effort will not be wasted and the bonds will be promptly de- 
livered, if such an opinion is forthcoming. 



APPENDICES 



Appendix A 
OUTLINE ANALYSIS OF SUBJECT 

Chapter I 
THE PROBLEM STATED 

A. The municipal bond is a creature of law,. 

a. General principles must be studied. 

B. The municipality existed before the nation. 

C. Municipal needs create municipal debt. 

D. Necessity for borrowing money. 

a. Annual taxation inadequate; illustrated. 

E. Procedure of bond issue outlined. 

F. Forms of: 

a. Tax ordinance ; 

b. Municipal budget; 

c. Bond ordinance. 

Chapter II 
THE MUNICIPAL BOND 

A. Is a negotiable instrument: 

a. Attributes of negotiability; 

b. Municipal bond has all these elements; 

c. Loses for the time its negotiability by delivery, if registered. 

B. Conditions of negotiability. 

C. The component parts of a municipal bond are: 

a. Face: 

1. Title of the instrument; 

2. Form : 

(1) Name of promissor; 

(2) Name of promisee; 

(3) Principal sum to be paid; 

(4) Due date; a promise to pay; 

(5) Interest at the rate stated; 

(6) The place and medium of payment; 

(7) Conversion provision; 

(8) Recital of authority and purpose; 

(9) Estoppel clause; 

(10) Testimonium; 

(11) Signatures and seal. 

b. Coupon, which is an independent promise to pay. 
c Back: 

1. Filing. 

2. Panels upon which appear forms for the registration certifi- 

cates. 

187 



188 MUNICIPAL BONDS 

Chapter III 
MUNICIPAL CORPORATIONS 

A. a. Definition of municipal corporations. 

b. They are creatures of the State. 

1. Constitutional provisions, and 

2. Legislative control. 

c. They are created by: 

1. Special charter or pursuant to 

2. General laws, and may be 

3. De facto corporations. 

B. a. Powers of municipal corporations are 

1. Express, the principal powers being the 

(1) Police power; 

(2) Power of taxation, and 

(3) Eminent domain. 

2. Implied, incident to the express grant. 

b. Powers of municipal corporations are divided into 

1. Governmental, and 

2. Proprietary powers. 

C. a. Municipal corporations are classified as 

1. Counties; 

2. True municipal corporations, and 

3. Quasi-municipal corporations, among which are 

(1) School districts and various 

(2) Taxing districts. 



Chapter IV 
MUNICIPAL PROPERTY AND IMPROVEMENTS 

A. Increase of public activities. 

a. Earliest recorded history shows co-operation in construction of: 

1. Roads; 

2. Bridges; 

3. City walls. 

b. Public health was seen to require: 

1. Water; 

2. Sewers; 

3. Baths. 

c. Public charity and the humanizing influence of Christianity created: 

1. Hospitals; 

2. Asylums. 

d. The evolution of the modern city. 

B. Municipal expenditures. 

a. General considerations; what is a municipal purpose? 

b. The expenditures are for: 

1. Running expenses; 

2. Debt service, funds for which are raised by annual taxation, 
and 

3. Public property or improvements, funds for which are bor- 
rowed. 



APPENDIX A 189 

c Improvements are made and property is acquired in one of two 
capacities: 

1. Governmental and 

2. Proprietary. 

C. Public Property. 

a. Capacity to hold and acquire property. 

b. Mode of acquisition is by 

1. Purchase; 

2. Gift ; 

3. Condemnation. 

c. Limitations on acquisition are: 

1. Popular vote and the 

2. Referendum. 

D. Public Improvements. 

a. Nature and grounds of power to make. 

b. Statutory provisions such as: 

1. Act Concerning Municipalities in New Jersey; 

2. Second-Class Cities Law and the Village Law in New York. 

c. Are, among others: 

1. Public buildings; 

2. ' Streets, ways and bridges ; 

3. Sewers and drains; 

4. Water supply; 

5. Lighting; 

6. Wharves and docks; 

7. Parks and public places; 

8. Markets ; 

9. Schools; 
10. Libraries. 

E. Improvements outside of municipality. 

F. Public utilities. 

G. Building houses and selling commodities to public. 



Chapter V 
TAXATION AND LIMITATION OF TAXES 

A. The Power to Tax. 

a. Tax defined. 

b. Primary form a direct property tax. 

c. Power to tax is 

1. Inherent in the sovereign ; 

2. Exercised by the legislature which may delegate it to 

(1) Municipalities, and to 

(2) Local boards. 

d. Taxes can be levied only for public use. 

B. Classes of taxes defined. 

a. Capitation or poll. 

b. Property. 

1. General. 

2. Assessments. 

c. Excise and income. 

C. Taxation for debt service. 

a. Illustrated. 

b. Its importance. 



190 MUNICIPAL BONDS 

D. Limitations on tax rates. 

a. Illustrated. 

b. Arguments against any tax limit for general purposes. 

c. Arguments against any tax limit for debt service. 

E. Revenues. 

Chapter VI 
MUNICIPAL BORROWING 

A. The power to incur indebtedness. 

a. Nature and scope. 

b. Municipal purposes. 

c. Does not include the power to issue negotiable securities. 

B. Limitations on the power to incur debt. 

a. General considerations. 

b. Limitations are 

1. Constitutional or 

2. Statutory. 

c. Illustrated. 

C. The power to issue negotiable instruments. 

a. Original issues. 

1. Nature of power. 

2. Nature of power is wholly statutory. 

b. Illustrated. 

c. Refunding. 

d. Ratification by legislature. 

D. Short-term loans. 

Chapter VII 
THE PROMISSOR IN THE BOND 

A. The Sovereign or the State. 

a. Cannot be sued without its consent. 

B. The county. 

a. The same property is taxed which is taxed for municipal purposes. 

b. Debt of subdivisions. 

c. Debt small compared to assessed valuation. 

C. The municipality, which may have: 

a. Implied power to borrow but must have 

b. Express power to issue negotiable instruments. 

D. The quasi-municipality, which may 

a. Borrow and tax; 

b. Borrow but not tax; 

c. Be taxed but may not borrow. 



Chapter VIII 

THE PROMISE AND THE PURPOSE OF THE BOND 

A. The character of the promise, 
a. Limited by tax rates: 

1. Constitutional. 

2. Statutory. 

3. Results in limited obligation. 



APPENDIX A 191 

b. Limited to a special fund, i.e., assessments. 

1. Bonds may not be negotiable instruments. 

2. Federal tort theory. 

c Limited by area of land taxed. 
B. The purpose. 

a. Bonds issued for self-sustaining public utilities such as: 

1. Water works. 

2. Wharves, docks and markets. 

b. Bonds issued for non-revenue producing improvements such as: 

1. Streets and sewers. 

2. Schools, hospitals and parks. 

Chapter IX 
THE MATURITY OF THE BOND 

A. Bonds may be classified as to time of payment: 

a. Term bonds which are absolutely 

1. Due and payable at one time, or 

2. Callable after a stated date. 

b. Debt service for term bonds: sinking funds. 

1. Contract with bondholder; 

2. Disadvantages of sinking funds. 

c. Serial bonds which are payable in: 

1. Equal annual installments; 

2. Substantially equal annual installments; 

3. Deferred installments. 

d. Debt service for serial bonds: no sinking fund. 

B. Term of bonds may be limited to life of improvement. 

a. Reason for such limitation. 

Chapter X 

SALE AND AWARD 

A. Private Sale defined. 

a. Advantages: 

1. To municipality; 

2. To broker. 

b. Disadvantages: 

1. To municipality; 

2. To broker. 

B. Public Sale defined. 

a. Advantages to municipality: 

1. Competition; 

2. Protection to officers. 

b. Disadvantages to municipality: 

1. Market conditions; 

2. Technical errors in procedure. 

c. Illustrative statutory provisions: 

1. In New York; 

2. In New Jersey. 

C. Par Sales are required by most statutes. 

a. Economic fallacy. ■ 

b. Political necessity. 

c. Evasion by 



192 MUNICIPAL BONDS 

1. Fiscal agency contracts; 

2. Proceedings contracts; 

3. Deposit agreements. 

d. Expenses of sale. 

e. Irregularities in procedure. 

D. Brokerage and commissions. 

E. Forms of 

a. Notice of sale; 

b. Propositions pursuant thereto. 

Chapter XI 
DEFAULT, AND REMEDY OF THE BONDHOLDER 

A. Default defined. 

a. Consequences as to: 

1. Interest; 

2. Principal. 

b. Prevalence of. 

c. Reasons for. 

1. Inability, because of 

(1) Lack of authority to issue; 

(2) Limited tax rate; 

(3) Shrinkage of assessed valuations. 

2. Bad faith. 

B. Remedy of the Bondholder. 

a. Bonds are not liens upon specific property. 

b. Necessity for obtaining judgment. 

c. Mandamus to levy tax. 

1. Where sufficient tax may be levied. 

2. Where sufficient tax may not be levied. 

d. Actions based on contract. 

e. Legislative relief. 

f. Good faith of issuing municipality. 

Chapter XII 
BONDS AS INVESTMENTS 

A. Definition and general considerations. 

B, Investments by individuals. 

a. Elements of an ideal investment: 

1. Security of principal; 

2. Fixed or definite interest; 

3. Fair income return; 

4. Merchantability ; 

5. Good collateral for loans; 

6. Freedom from taxation; 

7. Freedom from care; 

8. Satisfactory maturity; 

9. Convenient denomination; 
10. Possibility of appreciation. 

B. Investments by fiduciaries. 

a. Executors, trustees and savings banks. 

1. Regulated by statutes — Illustration. 

C. To secure postal savings deposits. 



APPENDIX A 193 

Chapter XIII 
TAXATION OF BONDS 

A. General considerations. 

B. The taxing power. 

a. Definition of the taxing power. 

b. Taxing power of the United States. 

c. Limitations upon the Federal taxing power. 

d. Taxing power of the States. 

e. Limitations upon the taxing power of the States. 

C. Taxation of the principal of State and municipal bonds. 

a! Taxation by the United States, 
b. Taxation by the States. 

D. Taxation of the income of State and municipal bonds. 

a. Nature of the tax. 

b. Taxation by the United States; the 16th amendment to the Federal 

Constitution. 

c. Taxation by the States. 

E. Taxation of bonds of non-residents. 

F. Inheritance Taxes. 

Chapter XIV 
VALUATION OF BONDS 

A. Money is a commodity. The price of its use is: 

a. Interest: 

1. Normal yield. 

2. Net yield. 

3. Tables of bond values. 

4. Basis. 

b. Fluctuations and differences in yield. 

c. Purchasing power of money. 

d. Market conditions. 

B. Bonds are not equally valuable; differences exist between bonds of 

a. City; 

b. County ; 

c. Tax districts, etc. 

C. Bonds of the same class are not equally valuable. The factors are: 

a. Valuations of taxable property; 

b. Indebtedness; 

c. Tax rates ; 

d. Population; 

e. Municipal credit. 

D. The practice of valuation described. 

E. Differences in expert opinion. 

F. Sources of information. 

Chapter XV 
INCONTESTABILITY AND VALIDATION 

A. The menace of default. 

a. Improvement in standards of honesty. 

b. Improvement in legislation. 



194 MUNICIPAL BONDS 

B. Estoppel by recital. 

a. Defined. 

b. Effect. 

C. Short statutes of limitations. 

a. Illustrations. 

D. Validation by decree of 

a. Administrative department; 

b. Court. 

1. Doctrine of res adjudicata. 

2. Constitutional difficulties illustrated. 

c. Court in Georgia. 

E. Registration by officials, effect -when 

a. Judicial function ; 

b. Ministerial function. 

F. Certification of signatures and seal. 



Chapter XVI 
PARTICULAR BONDS 

A. Considered as to issuing unit: 

a. Cities; 

b. Counties ; 

c. Minor municipalities; 

d. Tax districts. 

B. Considered as to purpose: 

a. To provide income-producing utilities; 

b. To provide other properties or improvements. 

C. Considered as to payment: 

a. Payable from direct general tax; 

b. Payable from assessments. 

D. Considered as to popular assent: 

a. Electoral bonds. 

Chapter XVII 
THE ATTORNEYS' FUNCTIONS 

A. General considerations. 

a. Difficulties usually arise before issue. 

B. When retained by the municipality. 

a. The advantages. 

b. The procedure. 

C. When retained by the purchaser. 

a. The disadvantages. 

b. The procedure. 

c. Failure to approve. 

D. The record of proceedings. 

a. Enables counsel to form opinion. 

b. Contents of the record. 

E. The opinion. 

a. Its usual form, preliminary and final. 

b. The meaning of the opinion. 

c. Qualified opinions. 

d. Merchantability of the opinion. 



APPENDIX A 195 

Chapter XVIII 
PRACTICAL SUGGESTIONS 



A. Publicity of bond sales. 

1. Advertising. List of periodicals. 

2. Circulars. 

B. Preparation of bonds — certification. 

C. Side agreements with dealers. 

D. Place of payment of principal and interest. 

E. Promptness in payment. 

F. Employment of counsel. 



Appendix B 

THE MUNICIPAL FINANCE ACT OF 
NORTH CAROLINA. 



An Act to Amend and Re-enact the Municipal Finance Act, Being Sec- 
tions 2918 to 2961, Consolidated Statutes of North Carolina. 

The General Assembly of North Carolina do enact: 

Section 1. That sections two thousand nine hundred and Sections of law 
eighteen to two thousand nine hundred and sixty-nine, inclusive, redacted 3 " 
of the Consolidated Statutes of North Carolina be and are hereby 
amended and reenacted to read as follows: 

SUBCHAPTER III. MUNICIPAL FINANCE ACT 

Article 23. General Provisions 



2918. Short title. This act may be cited as "The Municipal 
Finance Act, 1921." 

2919. Meaning of terms. In this act, unless the context other- 
wise requires, the expressions: 

"Bond ordinance" means an ordinance authorizing the issuance 
of bonds of a municipality; 

"Clerk" means the person occupying the position of clerk or 
secretary of a municipality; 

"Financial officer" means the chief financial officer of a munici- 
pality; 

"Funding bonds" means bonds issued to pay or extend the time 
of payment of debts incurred before December sixth, one thousand 
nine hundred and twenty-one, not evidenced by bonds; 

"Governing body" means the board or body in which the general 
legislative powers of a municipality are vested ; 

"Local improvement" means any improvements or property the 
cost of which has been or is to be specially assessed in whole or 
in part; 

"Municipality" means and includes any city, town, or incorpo- 
rated village in this State, now or hereafter incorporated; 

"Necessary expenses" means the necessary expenses referred to 
in section seven of article seven of the Constitution of North 
Carolina; 

"Publication" includes posting in cases where posting is author- 
ized by this act as a substitute for publication in a newspaper; 

"Refunding bonds" means bonds issued to pay or extend the 
time of payment of debts incurred before March seventh, one 
thousand nine hundred and seventeen, evidenced by bonds; 

197 



Short title. 



Terms defined. 



Bond 
ordinance. 



Clerk. 



Financial 
officer. 

Funding bonda 



Governing 
body. 

Local improve- 
ment. 



Municipality. 

Necessary 
expense. 



Publication. 



Refunding 
bonds. 



198 



MUNICIPAL BONDS 



Special assess- 
ments. 



Specially- 
assessed. 

Publication of 
ordinances and 
notices. 



Application 
and construc- 
tion of act. 



"Special assessments" means special assessments for local im- 
provements, levied on abutting property or other property specially 
benefited, or on street railroad companies or other companies or 
individuals having tracks in streets or highways, and "specially 
assessed" has a corresponding meaning. 

2920. Publication of ordinance and notices. An ordinance or 
notice required by this act to be published by a municipality shall 
be published in a newspaper published in the municipality, or, 
if no newspaper is published therein, in a newspaper published 
in the county and circulating in the municipality, or, if there 
is no such newspaper, the ordinance or notice shall be posted 
at the door of the building in which the governing body 
usually holds its meetings and at three other public places in the 
municipality. 

2921. Application and construction of act. This act shall apply 
to all municipalities. Every provision of this act shall be con- 
strued as being qualified by constitutional provisions, whenever 
such construction shall be necessary in order to sustain the con- 
stitutionality of any portion of this act. If any portion of this 
act shall be declared unconstitutional, the remainder shall stand, 
and the portion declared unconstitutional shall be exscinded. 



Article 24. Budget and Appropriations 



Fiscal year. 



Preparation of 
budget. 



Basis of 

budget. 



Contents of 
budget. 

Itemized 
estimate of 
expenses. 



Contingent 
fund. 



Itemized esti- 
mate of taxes 
and revenue. 



2922. The fiscal year. The fiscal year of every municipality 
shall begin either on the first day of June or on the first day of 
September, as the governing body of the municipality may deter- 
mine. 

2923. Budget prepared. Not earlier than one month before, nor 
later than one month after the beginning of each fiscal year of a 
municipality, the governing body shall cause to be prepared a plan 
for financing the municipality during said fiscal year, which plan 
shall be known as the budget and shall be based upon detailed 
estimates furnished by the several departments and other divisions 
of the municipal government. 

2924. What budget shall contain. The budget shall present the 
following information: 

1. An itemized estimate of the appropriations necessary to be 
made for the current expenses and for permanent improvements 
for each department and division of the municipal government for 
the fiscal year (exclusive of expense to be paid for by means of 
bonds issued under article twenty-six of this chapter), for the 
payment of the principal and interest of debts and for deficits of 
the previous fiscal year, with comparative statements in parallel 
columns of expenditures for corresponding items so far as possible 
for the two preceding fiscal years. This estimate may include a 
contingent fund not designated for any particular purpose not 
exceeding five per centum of the total estimated amount of other 
appropriations. 

2. An itemized estimate of the taxes required and of the esti- 
mated revenues of the municipality from all other sources for the 
fiscal year, the unencumbered balances of the appropriations, and 
of the surplus revenues of the previous fiscal year, with compara- 
tive statements in parallel columns of the taxes and other revenues 
for the two preceding fiscal years. 



APPENDIX B 



199 



3. A statement of the financial condition of the municipality, and 
such other information as the governing body may deem advisable 
to state. 

2925. Copy of budget filed for inspection. A copy of the budget 
shall be filed in the office of the clerk of the municipality for public 
inspection not later than ten days before its adoption by the gov- 
erning body, and a public hearing shall be given thereon by the 
governing body before the adoption of the budget, notice of which 
hearing shall be published. 

2926. Change of fiscal year. The fiscal year may be changed by 
resolution of the governing body, which resolution shall declare 
that the fiscal year shall thereafter begin on the first day of 
September or June, as the case may be. A budget and appropria- 
tion ordinance shall be adopted for a period commencing at the 
expiration of the current fiscal year, in which such resolution is 
passed, and ending at the end of the next succeeding new fiscal 
year. Such a budget shall be adopted within the month preceding 
or the month following the beginning of such period. 

2927. Annual appropriation ordinance. Not later than one 
month after the beginning of the fiscal year, the governing body 
shall pass the annual appropriation ordinance for the fiscal year, 
which shall be based on the budget. The total amount of appro- 
priations shall not exceed the total of the estimated revenue, 
unencumbered balances and surplus receipts. 

2928. Appropriations made before annual ordinance. In the in- 
terval between the beginning of a fiscal year and the adoption of 
the annual appropriation ordinance the governing body may make 
appropriations for the purpose of paying fixed salaries, the prin- 
cipal and interest of bonded debts and other loans, the stated com- 
pensation of officers and employees and indebtedness for work 
performed or materials furnished under contracts made before the 
beginning of the fiscal year, or for the ordinary expenses of the 
municipality, which appropriations shall be chargeable to the 
appropriations in the annual appropriation ordinances for that 
year. 

2929. Amendment of appropriations. At any time after the pas- 
sage of the annual appropriation ordinance, the governing body 
may amend such ordinance so as to authorize the transfer of 
balances appropriated for one purpose to another purpose, or to 
appropriate available revenues not included in the annual budget. 

The amendatory ordinance, unless it be for the appropriation of 
available revenues not included in the annual budget, shall be 
published one or more times at least one week before its final 
passage, with notice of the time when and place where it will be 
finally passed: Provided, however, that such ordinance may be 
passed during the last three months of a fiscal year, without any 
previous publication or notice. 

2930. Balances revert for future appropriations. At the close of 
each fiscal year the unencumbered balance of each appropriation 
shall revert to the general fund, and shall be subject to future 
appropriation. 

2931. Funds specially applied not affected. Nothing herein shall 
be construed to permit revenues which by statute are appropriated 
to a particular purpose to be appropriated to any other purpose, 
but such revenue shall nevertheless be included in the budget. 



Statement of 
financial condi- 
tion. 

Other informa- 
tion. 

Copy of budget 
filed. 

Public hearing. 



Fiscal year 
may be 
changed. 



Budget and 

appropriation 

ordinance. 



Time for adop- 
tion of budget. 

Annual 

appropriation 

ordinance. 



Limit of 
appropriations. 



Temporary 
appropriations. 



Purposes. 



Amendment of 
appropriations. 



Amendatory 
ordinance to be 
published. 



Proviso: 
Amendment 
within last 
quarter. 

Balances sub- 
ject to future 
appropriations. 



Funds appro- 
priated by 
statutes. 



200 



MUNICIPAL BONDS 



Article 25. Temporary Loans 



Temporary 
loans in antici- 
pation of 
collections. 



Payment of 
loans. 

Budget to 
provide for 

fiayment of 
oans. 

Loans to pay 
judgments or 



Time for 
payment. 

Loans exceed- 
ing one per 
cent of tax 
values. 



Loans in 
anticipation of 
bond sales. 



Maximum 
amount. 
Time of 
payment. 

Power to retire 
loans. 

Proviso : 
Reduction of 
bond issue. 



Negotiable 
notes. 

Renewal. 



Final limit 
Interest rate. 

Sale of notes. 

Resolution for 

temporary 

loans. 



2932. Money borrowed to meet appropriations. A municipality 
may borrow money for the purpose of meeting appropriations made 
for the current fiscal year, in anticipation of the collection of the 
taxes and revenues of such fiscal year, and within the amount of 
such appropriations. Such loans shall be paid not later than the 
tenth day of October in the next succeeding fiscal year. Provision 
shall be made in the annual budget and annual appropriation ordi- 
nance of each fiscal year for the payment of all unpaid loans predi- 
cated upon the taxes and revenues of the previous fiscal year. 

2933. Money borrowed to pay 'judgments or interest. For the 
purpose of paying a judgment recovered against a municipality, or 
paying the principal or interest of bonds due or to become due 
within two months and not otherwise adequately provided for, a 
municipality may borrow money in anticipation of the receipt of 
either the revenues of the fiscal year in which the money is bor- 
rowed or the revenues of the next succeeding fiscal year. Such 
loans shall be paid not later than the end of such next succeeding 
fiscal year. In the event, however, that a judgment or judgments 
against a municipality amount to more than one cent per hundred 
dollars of the assessed valuation of taxable property of the munici- 
pality for the year in which taxes were last levied before the 
recovery of the judgment, a loan to pay the judgment may be 
made payable in not more than five substantially equal annual 
installments, beginning within one year after the loan is made. 

2934. Money borrowed in anticipation of bond sales. At any 
time after a bond ordinance has taken effect as provided in article 
twenty-six herein, a municipality may borrow money for the pur- 
poses for which the bonds are to be issued, in anticipation of the 
receipt of the proceeds of the sale of the bonds, and within the 
maximum authorized amount of the bond issue. Such loans shall 
be paid not later than three years after the time of taking effect 
of the ordinance authorizing the bonds upon which they are predi- 
cated. The governing body may, in its discretion, retire any such 
loans by means of current revenues, special assessments, or other 
funds, in lieu of retiring them by means of bonds: Provided, 
however, that the governing body, before the actual retirement of 
any such loan by any means other than the issuance of bonds, 
under the bond ordinance upon which such loan is predicated, shall 
amend or repeal such ordinance so as to reduce the authorized 
amount of the bond issue by the amount of the loan to be so 
retired. Such an amendatory or repealing ordinance shall take 
effect upon its passage and need not be published. 

2935. Notes issued for temporary loans. Negotiable notes shall 
be issued for all moneys borrowed under the last two sections. 
Such notes may be renewed from time to time and money may be 
borrowed upon notes from time to time for the payment of any 
indebtedness evidenced thereby, but all such notes shall mature 
within the time limited by said sections for the payment of the 
original loan. No money shall be borrowed under said sections 
at a rate of interest exceeding the maximum rate permitted by 
law. The said notes may be disposed of by public or private nego- 
tiations. The issuance of such notes shall be authorized by resolu- 
tion of the governing body, which shall fix the actual or maximum 
face amount of the notes and the actual or maximum rate of 



APPENDIX B 



201 



interest to be paid upon the amount borrowed. The governing 

body may delegate to any officer the power to fix said face amount, Delegation of 

and rate of interest within the limitations prescribed by said reso- P owers - 

lution, and the power to dispose of said notes. All such notes Execution 

shall be executed in the manner provided in section two thousand ° no es ' 

nine hundred and fifty-four of this subchapter in relation to bonds. 

They shall be submitted to and approved by the attorney for the Approval of 

municipality before they are issued, and his written approval attorn ey. 

indorsed on the notes. 



Article 26. Permanent Financing 

2936. Not applied to temporary loans. The provisions of this 
article shall not apply to temporary loans made under article 
twenty-five, unless otherwise provided in said article. 

2937. For what purposes bonds may be issued. A municipality 
may issue its negotiable bonds for any one or more of the following 
purposes: 

1. For any purpose or purposes for which it may raise or appro- 
priate money, except for current expenses. 

2. To fund or refund a debt of the municipality incurred before 
December fifth, nineteen hundred and twenty-one, if such debt be 
payable at the time of the passage of the ordinance authorizing 
bonds to fund or refund such debt or be payable within one year 
thereafter, or if such debt, although payable more than one year 
thereafter, is to be canceled prior to its maturity and simultane- 
ously with the issuance of the bonds to fund or refund such debt: 
Provided, however, that bonds shall not be issued to refund serial 
bonds which mature in installments as provided in section two 
thousand nine hundred and fifty-two. 

2938. Ordinance for bond issue: 

1. Ordinance required. All bonds of a municipality shall be 
authorized by an ordinance passed by the governing body. 

2. What ordinance must show. The ordinance shall state: 

a. In brief and general terms the purpose for which the bonds 
are to be issued; 

b. The maximum aggregate principal amount of the bonds; 

c. That a tax sufficient to pay the principal and interest of the 
bonds shall be annually levied and collected; 

d. That a statement of the debt of the municipality has been 
filed with the clerk and is open to public inspection. 

e. One of the following provisions: 

(1) If the bonds are funding or refunding bonds or for local 
improvements of which at least one-fourth of the cost, exclusive of 
the cost of paving at street intersections, has been or is to be 
specially assessed, that the ordinance shall take effect upon its 
passage, and shall not be submitted to the voters; or 

(2) If the bonds are for a purpose other than the payment of 
necessary expenses, or if the governing body, although not required 
to obtain the assent of the voters before issuing the bonds, deems 
it advisable to obtain such assent, that the ordinance shall take 
effect when approved by the voters of the municipality at an elec- 
tion as provided in this act; or 

(3) In any other case, that the ordinance shall take effect 
thirty days after its first publication (or posting) unless in the 
meantime a petition for its submission to the voters is filed under 



Permanent 
financing. 

Temporary 
loans excepted. 

Purposes of 
bond issue. 



Current 
expenses 
barred. 

To fund or 
refund debts 
heretofore 
incurred. 



Proviso: 
Serial bonds 
not refunded. 



Bond issues to 
be ordered by- 
ordinance. 
Ordinance 
shall state : 
Purpose of 
issue. 
Maximum 
amount. 
Tax for 
principal and 
interest. 
Statement 
of debt. 



Ordinances 
taking effect 
on passage. 



Ordinances 
taking effect 
on approval 
of voters. 



Ordinances 
taking effect 
thirty days 
after 
publication. 



202 



MUNICIPAL BONDS 



Where 

ordinances 

effective. 



Specifications 
of contem- 
plated im- 
provements. 



Bonds for 
unrelated 
purposes. 

Proviso : 
Bonds for sepa- 
rate improve- 
ments of like 
character. 

Consolidation 
of bond issues. 



Bond ordi- 
nance before 
filing of 
petitions for 
improvements. 



Bonds not is- 
sued nor loans 
contracted 
until petitions 
filed. 

Determination 
of cost of 
work. 

Bond 

ordinance 
effective from 
passage. 

Proviso: 

Special 

assessments. 



Maturity of 
bonds. 

Governing 
body to deter- 
mine and 
declare. 



this act, and that in such event it shall take effect when approved 
by the voters of the municipality at an election as provided in this 
act. 

3. When the ordinance takes effect. A bond ordinance shall take 
effect at the time and upon the conditions indicated therein. If 
the ordinance provides that it shall take effect upon its passage no 
vote of the people shall be necessary for the issuance of the bonds. 

4. Need not specify location of improvement. In stating the 
purpose of a bond issue, a bond ordinance need not specify the 
location of any improvement or property, or the kind of pavement 
or other material to be used in the construction or reconstruction 
of streets, highways, sidewalks, curbs, or gutters, or the kind of 
construction or reconstruction to be adopted for any building, for 
which the bonds are to be issued. A description in a bond ordi- 
nance of a property or improvement, substantially in the language 
employed in sections two thousand nine hundred and forty-two of 
this subchapter to describe such a property or improvement, shall 
be a sufficiently definite statement of the purpose for which the 
bonds authorized by the ordinance are to be issued. 

2939. Ordinance not to include unrelated purposes. Bonds for 
two or more unrelated purposes, not of the same general class or 
character, shall not be authorized by the same ordinance: Pro- 
vided, however, that bonds for two or more improvements or prop- 
erties mentioned together in any one clause of subsection four of 
section two thousand nine hundred and forty-two of this sub- 
chapter may be treated as being but for one purpose, and may be 
authorized by the same bond ordinance. After two or more bond 
ordinances have been passed, the governing body may, in its dis- 
cretion, direct all or any of the bonds authorized by the ordinances 
to be actually issued as one consolidated bond issue. 

2940. {Obsolete.) 

2941. Ordinance and bond issue; when petition required. In 
cases where a petition of property owners is required by law for 
the making of local improvements, a bond ordinance authorizing 
bonds for such local improvements may be passed before any such 
petition is made, but no bonds for the local improvements in re- 
spect of which such petitions are required shall be issued under 
the ordinance, nor shall any temporary loan be contracted in an- 
ticipation of the issuance of such bonds, unless and until such 
petitions are made, and then only up to the actual or estimated 
amount of the cost of the work petitioned for. The determination 
of the governing body as to the actual or estimated cost of work 
so petitioned for shall be conclusive in any action involving the 
validity of bonds or notes or other indebtedness. The bond ordi- 
nance may be made to take effect upon its passage, notwithstand- 
ing that the necessary petitions for the local improvements have 
not been filed: Provided, that it appears upon the face of the 
ordinance that one-fourth or some greater proportion of the cost, 
exclusive of the cost of work at street intersections, has been or 
is to be assessed. 

2942. Determining periods for bonds to run: 

1. How periods estimated. Either in the bond ordinance or in a 
resolution passed after the bond ordinance but before any bonds 
are issued thereunder, the governing body shall, within the limits 
prescribed by subsection four of this section, determine and de- 
clare: 



APPENDIX B 



203 



a. The probable period of usefulness of the improvements or 
properties for which the bonds are to be issued; or 

b. If the bonds are to be funding or refunding bonds, either the 
shortest period in which the debt to be funded or refunded can be 
finally paid without making it unduly burdensome upon the tax- 
payers of the municipality, or, at the option of the governing body, 
the probable unexpired period of usefulness of the improvement or 
property for which the debt was incurred. 

2. In the case of a consolidated bond issue comprising bonds 
authorized by different ordinances for different purposes, and in 
the case of a bond issue authorized by but one ordinance for sev- 
eral related purposes in respect of which several different periods 
are determined as aforesaid, the governing body shall also deter- 
mine the average of the different periods so determined, taking 
into consideration the amount of bonds to be issued on account of 
each purpose or item in respect of which a period is determined. 

The period required to be determined as aforesaid shall be com- 
puted from a date not more than one year after the time of pas- 
sage of any bond ordinance authorizing the issuance of the bonds. 
The determination of any such period by the governing body shall 
be conclusive. 

3. Maturity of bonds. The bonds must mature within the period 
determined as aforesaid, or, if several different periods are so 
determined, then within said average period. 

4. Periods of usefulness. In determining, for the purpose of 
this section, the probable period of the usefulness of an improve- 
ment or property, the governing body shall not deem said period to 
exceed the following periods for the following improvements and 
properties, respectively, viz.: 

a. Sewer systems (either sanitary or surface drainage), forty 
years. 

b. Water supply systems, or combined water and electric light 
systems, or combined water, electric light, and power systems, 
forty years. 

c. Gas systems, thirty years. 

d. Electric light and power systems, separate or combined, thirty 
years. 

e. Plants for the incineration or disposal of ashes, or garbage, 
or refuse (other than sewage), twenty years. 

/. Public parks (including or not including a playground, as a 
part thereof, and any buildings thereon at the time of acquisition 
thereof, or to be erected thereon, with the proceeds of the bonds 
issued for such public parks), fifty years. 

g. Playgrounds, fifty years. 

h. Buildings for purposes not stated in this section, if they are: 

(1) Of fireproof construction, that is, a building the walls of 
which are constructed «of brick, stone, iron, or other hard, incom- 
bustible materials, and in which there are no wood beams or 
lintels, and in which the floors, roofs, stair halls, and public halls 
are built entirely of brick, stone, iron, or other hard, incombustible 
materials, and in which no woodwork or other inflammable mate- 
rials are used in any of the partitions, floorings, or ceiling (but the 
building shall be deemed to be of fireproof construction notwith- 
standing that elsewhere than in the stair halls and entrance halls 
there is wooden flooring on top of the fireproof floor, and that 
wooden sleepers are used, and that it contains wooden handrails 



Probable life 
of improve- 
ments and 
properties. 
Term of fund- 
ing or refund- 
ing bonds. 

Unexpired life 
of improve- 
ments. 

Averages in 
consolidated 
issues. 



Computation 
of period. 



Determinations 
conclusive. 

Maturity of 
bonds. 



Periods of 
usefulness. 



Sewer systems. 



Water, light, 
and power 
systems. 

Gas systems. 

Electric light 
and power 
systems. 
Crematories. 



Public parks. 



Playgrounds. 

Buildings: 
Of fireproof 
construction. 



204 



MUNICIPAL BONDS 



Nonfireproof 
construction. 



Of other 
construction. 
Bridges and 
culverts. 



Lands. 

Roads, streets 
or highways. 



Sand and 
gravel. 
Waterbound 
macadam. 

Bricks, blocks, 
asphalt, or 
concrete. 

Lands. 



Sidewalks. 



Systems of 
communica- 
tion. 

Fire engines 
and other 
vehicles. 



Land for 
cemeteries. 

Service mains. 



Elimination 
of grade 
crossings. 
Other 
equipment, 
apparatus, or 
furnishings. 
Other improve- 
ments or 
properties. 
Properties to 
which periods 
are applicable. 



Enlargements 
and extensions. 



and treads, made of hardwood, not less than two inches thick), 
forty years. 

(2) Of nonfireproof construction, that is, a building the outer 
walls of which are constructed of brick, stone, iron, or other hard, 
incombustible materials, but which in any other respect differs 
from a fireproof building as defined in this section, thirty years. 

(3) Of other construction, twenty years. 

i. Bridges and culverts (including retaining walls and ap- 
proaches), forty years, unless constructed of wood, and in that 
case, ten years. 

j. Lands for purposes not stated in this section, fifty years. 

k. Constructing or reconstructing the surface of roads, streets, 
or highways, whether including or not including contemporaneous 
constructing or reconstructing of sidewalks, curbs, gutters, or 
drains, and whether including or not including grading, if such 
surface: 

(1) Is constructed of sand and gravel, five years; 

(2) Is of waterbound macadam or penetration process, ten 
years; 

(3) Is of bricks, blocks, sheet asphalt, bitulithic, or bituminous 
concrete, laid on a solid foundation, or is of concrete, twenty 
years. 

/. Land for roads, streets, highways, or sidewalks, or grading, 
or constructing or reconstructing culverts, or retaining walls, or 
surface, or subsurface drains, fifty years. 

m. Constructing sidewalks, curbs, or gutters of brick, stone, 
concrete, or other material of similar lasting character, twenty 
years. 

n. Installing fire or police alarms, telegraph or telephone service, 
or other system of communication for municipal use, thirty years. 

o. Fire engines, fire trucks, hose carts, ambulances, patrol 
wagons, or any vehicles for use in any department of the munici- 
pality, or for the use of municipal officials, ten years. 

p. Land for cemeteries, or the improvement thereof, thirty years. 

q. Constructing sewer, water, gas, or other service connections, 
from the service main in the street to the curb or property line, 
when the work is done by the municipality in connection with any 
permanent improvement of or in any street, ten years. 

r. The elimination of any grade crossing or crossings and im- 
provements incident thereto, thirty years. 

s. Equipment, apparatus, or furnishings not included in the 
foregoing clauses of this subsection, ten years. 

/. Any improvement or property not included in other clauses of 
this subsection, forty years. 

5. Improvements and properties defined. The maximum periods 
fixed herein for the improvements and properties mentioned in 
clauses numbered from a to i, both inclusive, of subsection 4 of this 
section shall be applied thereto whether such improvements or 
properties are to be acquired, constructed, reconstructed, enlarged, 
or extended, in whole or in part, and whether the same are to 
include or are not to include buildings, lands, rights in lands, 
furnishings, equipment, machinery, or apparatus constituting a part 
of said improvements or properties at the time of acquisition, con- 
struction, or reconstruction. If the improvements of properties 
are to be an enlargement or extension of existing properties or 
improvements, the probable period of usefulness to be determined 



APPENDIX B 



205 



as aforesaid may be either that of the existing properties or im- 
provements; or that of the enlargement or extension. Bonds for 
any or all improvements or properties included in any one clause 
of subsection 4 above may for the purposes of this section be 
deemed by the governing body to be for but one improvement or 
property. 

6. Kind of construction determined. If the bonds are for a 
building referred to in clause h of subsection 4 above, and the 
bond ordinance does not state the kind of construction of the build- 
ing, or if the bonds are for street improvements mentioned in 
clause k of subsection 4 above, and the bond ordinance does not 
state the kind or kinds of pavement or other material to be used, 
then the kind of construction, or the kind or kinds of pavement or 
other material, as the case may be, shall be determined by resolu- 
tion before any of the bonds are issued. 

7. Shortest period of payment. In determining, for the purpose 
of this section, the shortest period in which a debt to be funded 
or refunded hereunder can be finally paid without making it 
unduly burdensome upon the taxpayers of the municipality, the 
governing body shall not deem said period to be greater than the 
following periods in the following cases, respectively: 

a. Thirty years, if funding bonds are to be issued. 

b. Thirty years, if refunding bonds are to be issued, and the net 
debt of the municipality, as stated in the debt statement filed 
pursuant to section two thousand nine hundred and forty-three, is 
not more than four per centum of the assessed valuation set forth 
in said statement. 

c. Forty years, if refunding bonds are to be issued, and said 
net debt is more than four but not more than five per centum of 
said assessed valuation. 

d. Fifty years, if refunding bonds are to be issued, and said net 
debt is more than five per centum of said assessed valuation. 

2943. Sworn statement of indebtedness: 

1. What shall be shown. After the introduction and before the 
final passage of a bond ordinance an officer designated by the 
governing body for that purpose shall file with the clerk a state- 
ment showing the following: 

(a) The gross debt (which shall not include debt incurred or to 
be incurred in anticipation of the collection of taxes or in anticipa- 
tion of the sale of bonds other than funding and refunding bonds), 
which gross debt shall be as follows: 

(1) Outstanding debt incurred before December sixth, one thou- 
sand nine hundred and twenty-one, not evidenced by bonds. 

(2) Outstanding bonded debts. 

(3) Bonded debt to be incurred under ordinances passed or 
introduced. 

(b) The deductions to be made from gross debt in computing 
net debt, which deductions shall be as follows: 

(1) Amount of unissued funding or refunding bonds included 
in gross debt. 

(2) Amount of sinking funds or other funds held for the pay- 
ment of any part of the gross debt other than debt incurred for 
water, gas, electric light, or power purposes or two or more of 
said purposes. 

(3) The amount of uncollected special assessments theretofore 
levied on account of local improvements for which any part of the 



Bonds for 
improvements 
of like 
classification. 



Determination 
of classifica- 
tion. 



Determination 
of shortest 
period of 
payment. 



Thirty years. 
Thirty years. 



Forty years. 



Fifty years. 



Statements to 
be filed before 
passage of 
ordinance. 



Gross debt. 



Outstanding 
floating debt. 

Outstanding 
bond debt. 
Bonded debt to 
be incurred. 

Deductions. 



Unissued fund- 
ing bonds. 

Amount of 
sinking fund 
or other funds. 



Uncollected 

special 

assessments. 



206 



MUNICIPAL BONDS 



Amount of 
special assess- 
ments to be 
levied. 



Bonded debt 
for water, gas, 
light, and 
power systems. 
Net debt. 

Assessed 
valuation of 
property. 
Percentage. 

Limitation. 



Statements 
filed for 
inspection. 
Statements 
deemed true. 



Impeachment 
of statements. 



Publication 
of bond 
ordinance. 
Form of 
notice. 



gross debt was or is to be incurred which will be applied when 
collected to the payment of any part of the gross debt. 

(4) The amount, as estimated by the engineer of the munici- 
pality or officer designated for that purpose by the governing body 
or by the governing body itself, of special assessments to be levied 
on account of local improvements for which any part of the gross 
debt was or is to be incurred, and which, when collected, will be 
applied to the payment of any part of the gross debt. 

(5) The amount of bonded debt included in the gross debt and 
incurred, or to be incurred, for water, gas, electric light or power 
purposes, or two or more of said purposes. 

(c) The net debt, being the difference between the gross debt 
and the deductions. 

(d) The assessed valuation of property as last fixed for munici- 
pal taxation. 

(e) The percentage that the net debt bears to said assessed 
valuation. 

2. Limitations upon passage of ordinance. The ordinance shall 
not be passed unless it appears from said statement that the said 
net debt does not exceed eight (8) per cent of said assessed valua- 
tion, unless the bonds to be issued under the ordinance are to be 
funding or refunding bonds, or are bonds for water, gas, electric 
light or power purposes, or two or more of said purposes. 

3. Statement filed for inspection. Such statements shall remain 
on file with the clerk and be open to public inspection. In any 
action or proceeding in any court involving the validity of bonds, 
said statement shall be deemed to be true and to comply with the 
provisions of this act, unless it appears (in an action or proceed- 
ing commenced within the time limited by section 2945 for the 
commencement thereof), first, that the representations contained 
therein could not by any reasonable method of computation be 
true; and second, that a true statement would show that the ordi- 
nance authorizing the bonds could not be passed. 

2944. Publication of bond ordinance. A bond ordinance shall be 
published once in each of two successive weeks after its final 
passage. A notice substantially in the following form (the blanks 
being first properly filled in), with the printed or written signature 
of the clerk appended thereto, shall be published with the ordi- 
nance: 



The foregoing ordinance was passed on the. . . .day of , 

19 , and was first published (or posted), on the day of 

19.... 

Any action or proceeding questioning the validity of said ordi- 
nance must be commenced within thirty days after its first publi- 
cation (or posting). 

> 

Clerk (or Secretary). 

2945. Limitation of action to set aside ordinance. Any action or 
proceeding in any court to set aside a bond ordinance, or to obtain 
any other relief upon the ground that the ordinance is invalid, 
must be commenced within thirty days after the first publication 
of the notice aforesaid and the ordinance or supposed ordinance 
Actions barred, referred to in the. notice. After the expiration of such period of 
limitation, no right of action or defense founded upon the in- 



Limitation of 
action. 



APPENDIX B 207 

validity of the ordinance shall be asserted, nor shall the validity 
of the ordinance be open to question in any court upon any ground 
whatever, except in an action or proceeding commenced within 
such period. 

2946. {Obsolete.) 

2947. Ordinance requiring popular vote: 

1. Petition filed. A petition demanding that a bond ordinance Petition for 
be submitted to the voters may be filed with the clerk within thirty electlon - 
days after the first publication of the ordinance. The petition Specification 
shall be in writing and signed by voters of the municipality equal Uf e ntg # uire * 
in number to at least twenty-five per centum of the total number 
of registered voters in the municipality as shown by the registra- 
tion books for the last preceding election for municipal officers 
therein. The residence address of each signer shall be written 
after his signature. Each signature to the petition shall be veri- Verification of 
fied by a statement (which may relate to a specified number of signatures, 
signatures), made by some adult resident freeholder of the munici- 
pality, under oath before an officer competent to administer oaths, 
to the effect that the signature was made in his presence and is 
the genuine signature of the person whose name it purports to be. 
The petition need not contain the text of the ordinance to which Need not con- 
it refers. The petition need not be all on one sheet, and if on Separate 
more than one sheet, it shall be verified as to each sheet. sheets. 

3. Sufficiency of petitions. The clerk shall investigate the suffi- Clerk to 
ciency of the petition and present it to the governing body with a sufficiency 6 of 
certificate stating the result of his investigation. The governing petition. 
body shall thereupon determine the sufficiency of the petition and Determination 
the determination of the governing body shall be conclusive. 

2948. Elections on bond issue: 

1. What majority required. If a bond ordinance provides for Majority of 
the issuance of bonds for a purpose other than the payment of registered 
necessary expenses of the municipality, the approval of a majority 

of the qualified voters of the municipality, as required by the 
Constitution of North Carolina, shall be necessary in order to Majority of 
make the ordinance operative. If, however, the bonds are to be votes cast - 
issued for necessary expenses, the affirmative vote of the majority 
of the voters voting on the bond ordinance shall be sufficient to 
make it operative, in all cases where the ordinance is required by 
this act to be submitted to the voters. 

2. When election held. Whenever the taking effect of an ordi- Time for 
nance authorizing the issuance of bonds is dependent upon the e *ection. 
approval of the ordinance by the voters of a municipality, the 
governing body may submit the ordinance to the voters at an elec- 
tion to be held not more than six months after the passage of the 
ordinance. The governing body may call a special election for special 
that purpose or may submit the ordinance to the voters at the elections. 
regular municipal election next succeeding the passage of the ordi- Limitations. 
nance, but no such special election shall be held within one month 

before or after a regular election. Several ordinances or other Separate mat- 
matters may be voted upon at the same election. ters voted on. 

3. New registration. The governing body of the city or town in New registra- 
which such election is held may, in their discretion, order a new Non- 
registration of the voters for such election. The books for such 

new registration shall remain open in each precinct from nine a.m. Time of 
to six p. m. on each day, except Sundays and holidays, for three reglS 
weeks, beginning on a Monday morning and ending on the second 



208 



MUNICIPAL BONDS 



Election 
officers. 

Proviso: 
Registration ori 
Saturdays. 
Sufficiency of 
notice. 



Change of 
register. 



Notice of 
election. 



Statements to 
be made. 



Ballots. 



Return of 
votes. 



Canvass of 
returns. 



Application of 
general law. 



Certificate 
of result. 



Record of 
certificate. 
Original filed. 

Limitation of 
actions as to 
election. 



Proviso : 

towns 

excepted. 



Saturday evening before the election. A registrar and two judges 
of election shall be appointed by the governing body for each pre- 
cinct: Provided, that the books shall be open at the polling places 
on each Saturday during the registration period. Sufficient notice 
shall be deemed to have been given of such new registration and 
of the appointment of the election officers if a notice thereof be 
published at least thirty (30) days before the closing of the regis- 
tration books, stating the hours and days for registration. It 
shall not be necessary to specify in said notice the places for 
registration. In case the registrar shall fail or refuse for any 
cause to perform his duties, it shall be lawful for the clerk to 
appoint another person to perform such duties, and no notice of 
such appointment shall be necessary. 

4. Notice of election. A notice of the election shall be deemed 
sufficiently published if published once not later than twenty days 
before the election. Such notice shall state the maximum amount 
of the proposed bonds and the purpose thereof, and the fact that 
a tax will be levied for the payment thereof. The date of the 
election shall be stated therein. 

5. Ballots. A ballot or ballots shall be furnished to each quali- 
fied voter at said election, which ballots may contain the words 

"for the ordinance authorizing $ bonds (briefly stating 

the purpose), and a tax therefor," and "against the ordinance 

authorizing $ bonds (briefly stating the purpose), and a 

tax therefor," and if one ballot contains the two alternatives it 
may contain squares in one of which the voter may make a (X) 
mark, but this form of ballot is not prescribed. 

6. Returns canvassed. The officers appointed to hold the elec- 
tion in making return of the result thereof, shall incorporate 
therein not only the number of votes cast for and against each 
ordinance submitted, but also the number of voters registered and 
qualified to vote in the election. The governing body shall canvass 
the returns, and shall include in their canvass the votes cast and 
the number of voters registered and qualified to vote in the elec- 
tion, and shall judicially determine and declare the result of the 
election. 

7. Application of other laws. Except as herein otherwise pro- 
vided, the registration and election shall be conducted in accord- 
ance with the laws then governing elections for municipal officers 
in such municipality, and governing the registration of the electors 
for such election of officers. 

8. Statement of result. The board shall prepare a statement 
showing the number of votes cast for and against each ordinance 
submitted, and the number of voters qualified to vote in the elec- 
tion, and declaring the result of the election, which statement shall 
be signed by a majority of the members of the board and delivered 
to the clerk of the municipality, who shall record it in the book 
of ordinances of the municipality and file the original in his office 
and publish it once. 

9. Limitation as to actions. No right of action or defense 
founded upon the invalidity of the election shall be asserted, nor 
shall the validity of the election be open to question in any court 
upon any ground whatever, except in an action or proceeding com- 
menced within thirty days after the publication of such statement: 
Provided, that sections 2947 and 2948 shall not apply to the in- 
corporated towns of Madison County. 



APPENDIX B 



209 



2949. Preparation for issuing bonds. At any time after the 
passage of a bond ordinance, all steps preliminary to the actual 
issuance of bonds under the ordinance may be taken, but the 
bonds shall not be actually issued unless and until the ordinance 
takes effect. 

2950. Within what time bonds issued. After a bond ordinance 
takes effect, bonds may be issued in conformity with its provi- 
sions at any time within three years after the ordinance takes 
effect, unless the ordinance shall have been repealed, which repeal 
is permitted (without the privilege of referendum upon the ques- 
tion of appeal), unless notes shall have been issued on anticipation 
of the receipts of the proceeds of the bonds and shall be out- 
standing. 

2951. Amount and nature of bonds determined. The aggregate 
amount of bonds to be issued under a bond ordinance, the rate or 
rates of interest they shall bear, not exceeding six per centum per 
annum, payable semi-annually, and the times and place or places 
of payment of the principal and interest of the bonds, shall be 
fixed by resolution or resolutions of the governing body. The 
bonds may be issued either all at one time or from time to time 
in blocks, and different provisions may be made for different 
blocks. 

2952. Bonded debt payable in installments. Each bond issue 
made under this act shall mature in annual installments or series, 
the first of which shall be made payable not more than three years 
after the date of the first issued bonds of such issue, and the last 
within the period determined and declared pursuant to section 
two thousand nine hundred and forty-two of this subchapter. No 
such installment or series shall be more than two and one-half 
times as great in amount as the smallest prior installment or 
series of the same bond issue. If all of the bonds of an issue are 
not issued at the same time, the bonds at any one time outstanding 
shall mature as aforesaid. 

2953. Medium and place of payment. The bonds may be made 
payable in such kinds of money and at such place or places within 
or without the State of North Carolina as the governing body may 
by resolution provide. 

2954. Formal execution of bonds. The bonds shall be issued in 
such form as the officers who execute them shall adopt, except as 
otherwise provided by the governing body. They shall be signed 
by two or more officers designated by the governing body, or, if 
the governing body makes no such designation, then by the mayor 
or other chief executive officer and by the clerk, and the corporate 
seal of the municipality shall be affixed to the bonds. The bonds 
may have coupons attached for the interest to be paid thereon, 
which coupons shall bear a facsimile signature of the clerk in 
office, at the date of the bonds or at the date of delivery thereof. 
The delivery of bonds so executed shall be valid notwithstanding 
any change in the' officers or in the seal of the municipality occur- 
ring after the signing and sealing of the bonds. 

2955. Registration and transfer of bonds: 

1. Bonds payable to bearer. Bonds issued under this act shall 
be payable to the bearer unless they are registered as provided in 
this section; and each coupon appertaining to a bond shall be 
payable to the bearer of the coupon. 



Preparation 
for bond issue. 



Time for issu- 
ance of bonds. 



Repeal of 
ordinance. 

Notes barring 
repeal. 



Determination 
of terms of 
bonds. 



Bonds payable 
in install- 
ments. 
Times of 
maturity. 



Proportion of 
installments. 



Bonds issued 
at intervals. 



Medium and 
place of 
payment. 



Form of 
bonds. 



Execution. 



Coupons. 



Delivery. 



Bonds and cou- 
pons payable 
to bearer. 



210 



MUNICIPAL BONDS 



Registration 
or transfer 
agent. 

Bonds 
registered at 
request of 
owner. 

Payable to reg- 
istered owner. 



Transfer of 

registered 

bonds. 



Registration 
and transfer 
noied on 
bonds. 

Coupons can- 
celed on regis- 
tration of 
bonds. 
Recital of 
agreement in 
bonds. 



Sale below par 
forbidden. 



Advertisement 
of sale. 



Guaranty of 
bids. 



Publication 
of notice. 



Determination 
as to financial 
or trade 
journal. 



Bids opened. 

Awarded. 

Delegation of 
powers 



2. Registration and effect. A municipality may keep in the 
office of its financial officer or in the office of a bank or trust com- 
pany appointed by the governing body as bond registrar or transfer 
agent, a register or registers for the registration and transfer of 
its bonds, in which it may register any bond at the time of its 
issue, or, at the request of the holder, thereafter. After such 
registration the principal and interest of the bond shall be payable 
to the person in whose name it is registered except in the case of 
a coupon bond registered as to principal only, in which case the 
principal shall be payable to such person, unless the bond shall 
be discharged from registry by being registered as payable to 
bearer. After registration a bond may be transferred on such 
register by the registered owner in person or by attorney, upon 
presentation to the bond registrar, accompanied by delivery of a 
written instrument of transfer in a form approved by the bond 
registrar, executed by the registered owner. 

3. Registration and transfer noted on bond. Upon the registra- 
tion or transfer of a bond as aforesaid, the bond registrar shall 
note such registration or transfer on the back of the bond. Upon 
the registration of a coupon bond as to both principal and interest 
he shall also cut off and cancel the coupons. 

4. Agreement for registration. A municipality may, by recital 
in its bonds, agree to register the bonds as to principal only, or 
agree to register them either as to principal only or as to both 
principal and interest at the option of the bondholder. 

2956. Sale of bonds. All bonds of a municipality shall be sold 
at not less than par. They shall be advertised and sold upon 
sealed proposals, or at public auction, unless the sale is made 
within thirty days after failure to receive any legally acceptable 
bid in response to a public offering made as provided in this 
section. 

Whenever bonds are to be sold pursuant to advertisement, there 
shall be published, at least once, a notice containing a description 
of the bonds to be sold, the place of sale, and the time of sale, or 
time limited for the receipt of proposals, which shall be not less 
than ten days after the first publication of the notice. The notice 
shall state that bidders must present with their bids a certified 
check upon an incorporated bank or trust company, payable to the 
order of the municipality or of an executive, financial or clerical 
officer thereof, or a sum of money for or in an amount equal to 
two (2) per centum of the face amount of bonds bid for, to secure 
the municipality against any loss resulting from a failure of the 
bidder to comply with the terms of his bid. The said notice shall 
be published not only in the manner prescribed by section two 
thousand nine hundred and twenty, but also at least ten days 
before the expiration of the time limited for the receipt of bids, in 
a financial paper or trade journal published within the State of 
North Carolina, which publishes from time to time notices of the 
sale of municipal bonds; and the determination of the governing 
body that the paper or journal named for said publication is such 
financial paper or trade journal, and that it publishes from time 
to time notices of the sale of municipal bonds shall be conclusive. 

Proposals submitted pursuant to such notices shall be opened 
in public and the bonds shall be awarded to the highest bidder, 
unless all bids are rejected. The governing body may delegate 
the power to sell bonds to a committee thereof, or any two offi- 



APPENDIX B 



211 



cers, but every private sale of bonds shall be made or confirmed 
by the governing body. Bonds of the municipality sold out of a 
sinking fund of a municipality shall be sold as provided in this 
section, except that such bonds may be sold for less than par. 

Nothing herein shall prevent a municipality from awarding its 
bonds to the bidder offering to take them at the lowest rate of 
interest, provided the notice of sale invites bidders to name rate 
of interest which the bonds are to bear. 

2957. Application of funds. The proceeds of the sale of bonds 
under this act shall be used only for the purposes specified in the 
ordinance authorizing said bonds, and for the payment of the 
principal and interest of temporary loans made in anticipation of 
the sale of bonds: Provided, however, that if for any reason any 
part of such proceeds are not applied to or are not necessary for 
such purposes, such unexpended part of the proceeds shall be 
applied to the payment of the principal or interest of said bonds. 
The cost of preparing, issuing, and marketing bonds shall be 
deemed to be one of the purposes for which the bonds are issued. 

2958. Bonds incontestable after delivery. Any bonds reciting 
that they are issued pursuant to this act shall in any action or 
proceeding involving their validity be conclusively deemed to be 
fully authorized by this act, and to have been issued, sold, exe- 
cuted, and delivered in conformity herewith, and with all other 
provisions of statutes applicable thereto, and shall be incontest- 
able, anything herein or in other statutes to the contrary not- 
withstanding, unless such action or proceeding is begun prior to 
the delivery of such bonds. 

2959. Taxes levied for payment of bonds. The full faith and 
credit of the municipality shall be deemed to be pledged for the 
punctual payment of the principal of and interest on every bond 
and note issued under this act, including assessment bonds or 
other bonds for which special funds are provided. The govern- 
ing body shall annually levy and collect a tax ad valorem upon 
all the taxable property in the municipality sufficient to pay the 
principal and interest of all bonds issued under this act as such 
principal and interest become due: Provided, however, that such 
tax may be reduced by the amount of other moneys appropriated 
and actually available for such purpose. 

So much of the net revenue derived by the municipality in any 
fiscal year from the operation of any revenue producing enter- 
prise owned by the municipality after paying all expenses of 
operating, managing, maintaining, repairing, enlarging, and ex- 
tending such enterprise, shall be applied, first to the payment of 
the interest, payable in the next succeeding year on bonds issued 
for such enterprise, and next, to the payment of the amount 
necessary to be raised by tax in such succeeding year for the pay- 
ment of the principal of said bonds. All money derived from the 
collection of special assessments for local improvements for which 
bonds or notes were issued shall be placed in a special fund and 
used only for the payment of bonds or notes issued for the same 
or other local improvements. 

Every municipality shall have the power to levy taxes ad 
valorem upon all taxable property therein for the purpose of 
paying the principal of or the interest on any bonds or notes for 
the payment of which the municipality is liable, issued under 
any act other than this act, or for the purpose of providing a 



Confirmation 
of sales. 

Sales out of 
sinking fund. 

Sales at lowest 
interest. 



Application of 
proceeds. 



Proviso: Bal- 
ance to pur- 
chase of bonds. 



Cost of prepa- 
ration issue, 
and marketing. 
Bonds incon- 
testable after 
delivery. 



Faith and 
credit pledged 
for payment. 



Taxes. 



Proviso: Re- 
duction of tax. 



Application of 
revenue from 
bonded enter- 
prises. 



Application of 
special assess- 
ments. 



Power to levy 
taxes. 



212 



Taxes for pay- 
ment of bonds 
not subject to 
limitations. 

Levy and 

collection of 
taxes. 



MUNICIPAL BONDS 

sinking fund for the payment of said principal, or for the purpose 
of paying the principal of or interest on any notes issued under 
this act. 

The powers stated in this section in respect of the levy of taxes 
for the payment of the principal and interest of bonds and notes 
shall not be subject to any limitation prescribed by law upon the 
amount or rate of taxes which a municipality may levy. Taxes 
levied under this section shall be levied and collected in the same 
manner as other taxes are levied and collected upon property in 
the municipality. 






Restrictions ori 
powers as to : 



Appropria- 
tions. 

Incurring 
debt. 

Expenditures. 



Entrance into 
contracts. 



Authorization 
of bond issue 
and appro- 
priation. 

Passage of 
ordinances and 
resolutions. 



Proviso : 
Approval of 
acts and 
ordinances. 



Enforcement 
of orders of 
court. 



Article 27. 



Restrictions Upon the Exercise of Municipal 
Powers. 



2960. In borrowing or expending money: 

1. No municipality shall: 

a. Make an appropriation of money except as provided in this 
act; 

b. Borrow money or issue bonds' or notes except as provided in 
this act; 

c. Make an expenditure of money unless the money shall have 
been appropriated as provided in this act, or unless the expendi- 
ture is a payment of a judgment against the municipality or is a 
payment of the principal or interest of a bond or note of the 
municipality; or, 

d. Enter into any contract involving the expenditure of money 
unless a sufficient appropriation shall have been made therefor, 
except a continuing contract to be performed in whole or in part 
in an ensuing fiscal year, in which case an appropriation shall be 
made sufficient to meet the amount to be paid in the fiscal year 
in which the contract is made. 

2. The authorization of bonds by a municipality shall be deemed 
to be an appropriation of the maximum authorized amount of the 
bonds for the purposes for which they are to be issued. 

2961. Manner of passing ordinances and resolutions. Ordinances 
and resolutions passed pursuant to this act shall be passed in the 
manner provided by other laws for the passage of ordinances and 
resolutions, but shall not be subject to the provisions of other 
laws prescribing conditions, acts, or things necessary to exist, 
happen, or be performed precedent to or after the passage of 
ordinances or resolutions in order to give them full force and 
effect: Provided, however, that in any municipality in which the 
acts of the governing body thereof involving the raising or ex- 
penditure of money are required by law to be approved by some 
other official board or officer of the municipality in order to make 
them effective, all ordinances and resolutions passed by the gov- 
erning body under this act shall, unless they relate solely to 
elections held under this act, be so approved before they take 
effect. 

2962. Enforcement of act. If any board or officer of a munici- 
pality shall be ordered by a court of competent jurisdiction to 
levy or collect a tax to pay a judgment or other debt, or to per- 
form any duty required by this act to be performed by such board 
or officer, and shall fail to carry out such order, the court, in addi- 
tion to all other remedies, may appoint its own officers or other 
persons to carry out such order. 



APPENDIX B 



213 



2963. Limitation of tax for general -purposes. For the purpose 
of raising revenue for defraying the expenses incident to the 
proper government of the municipality, the governing body shall 
have the power and it is hereby authorized to levy and collect an 
annual ad valorem tax on all taxable property in the munici- 
pality at a rate not exceeding one dollar on the one hundred 
dollars valuation of said property, notwithstanding any other 
law, general or special, heretofore or hereafter enacted, except 
a law hereafter enacted expressly repealing or amending this sec- 
tion: Provided, that in cities where the taxable values for the 
year 1920 amounted to one hundred million dollars or more, the 
rate of taxation for general purposes shall not exceed sixty-five 
(65) cents on the one hundred dollars valuation. 

2964. Certain taxes validated. All taxes levied by any munici- 
pality after the enactment of chapter one hundred and thirty- 
eight of public laws of one thousand nine hundred and seventeen, 
and prior to December sixth, one thousand nine hundred and 
twenty-one, are hereby ratified and validated, notwithstanding 
the rate of said taxes exceeded the maximum rate prescribed by 
law, or any other defect or irregularity in the levy thereof. 

2965. Outstanding floating debt validated, and may be funded. 
All floating or other indebtedness, not evidenced by bonds, which 
was outstanding on December sixth, one thousand nine hundred 
and twenty-one, and was incurred by a municipality in good 
faith for necessary expenses thereof (including floating or other 
indebtedness incurred in anticipation of the collection of taxes 
or for current expenses) is hereby validated, notwithstanding 
any want of power or authority to incur indebtedness for the 
purpose for which such indebtedness was incurred, and notwith- 
standing any defect in the procedure for incurring indebtedness, 
or any other defect or illegality, including the failure to observe 
any debt limit prescribed by law. The municipality may fund 
such outstanding indebtedness by issuing bonds as herein pro- 
vided. 

2966-2969, inclusive (obsolete). 

Sec. 2. All acts and parts of acts, whether general, special, 
private or local, regulating or relating in any way to the issuance 
of bonds or other obligations of a municipality, or relating to the 
subject-matter of this act, are hereby repealed: Provided, how- 
ever, that this act shall not affect any local or private act enacted 
at the present session of the General Assembly, or regular session 
of one thousand nine hundred and twenty-one, but the powers 
hereby conferred and the methods of procedure hereby provided 
shall be deemed to be conferred and provided in addition to and 
not in substitution for those conferred or provided by any such 
local or private act enacted at the present session of the General 
Assembly, or regular session of one thousand nine hundred and 
twenty-one, so that any municipality may, at its option, proceed 
under any such local or private act applicable to it enacted at the 
present session of the General Assembly or regular session of one 
thousand nine hundred and twenty-one without regard to the 
restrictions imposed by this act, or may proceed under this act 
without regard to the restrictions imposed by any other act: 
Provided further, that this act shall not affect any of the pro- 
visions of article nine of subchapter one of chapter fifty-six of 
the Consolidated Statutes (originally chapter fifty-six of the 



Tax for gen- 
eral purposes. 



Limit of rate. 



Proviso: 
Rate in larger 
cities. 



Certain taxes 
validated. 



Outstanding 

debts 

validated. 



Power to fund 
debt. 



Repealing 
clause. 



Proviso: 
Local and 
private acts. 
Powers 
additional. 



Proviso: Acts 
not affected. 



214 



Proviso : 
Action here- 
tofore had. 



Proviso: 
Bonds and 
notes not 
invalidated. 



Specific repeal. 



Printing and 
distribution 
of act. 



MUNICIPAL BONDS 

Public Laws of one thousand nine hundred and fifteen), except 
those provisions which prescribe methods of procedure for bor- 
rowing money or issuing bonds or other obligations, and said 
article shall apply to all municipalities in this State, notwith- 
standing any inconsistent, general, special, local or private laws: 
Provided further, that this act shall not affect any acts or pro- 
ceedings heretofore done or taken for the issuance of bonds or 
other obligations under the Municipal Finance Act, as it stood 
prior to the ratification of this act or under any other act, and 
every municipality is hereby authorized to complete said acts and 
proceedings pursuant to the acts under which they were done or 
taken, and to issue said bonds or other obligations under such 
acts in the same manner as if this act had not been passed: 
Provided further, that this act shall not render invalid any bonds 
or notes or proceedings for the issuance of bonds or notes in 
cases where such bonds, notes or proceedings have been vali- 
dated by any other act. 

Sec. 3. The whole of chapter three of the Public Laws of one 
thousand nine hundred and twenty, extra session, except section 
six thereof, is hereby repealed. 

Sec. 4. Immediately upon the ratification of this act, the Secre- 
tary of State shall cause to be printed in pamphlet form at least 
one thousand five hundred copies hereof, and to cause a copy of 
such pamphlet to be mailed to every city and town in this State. 

Sec. 5. That this act shall be in full force from and after its 
ratification. 

Ratified this the 20th day of December, A.D. 1921. 






■■ 



Appendix C 

DEFINITIONS OF TERMS USED IN INVESTMENT 

BANKING 

Accrued interest. 

The interest at the rate borne by the bond from the date 
of sale to the next coupon or interest payment date, or from 
the last interest or coupon date to date of settlement. In 
making computations the day of settlement is excluded. 

All or none. 

A condition imposed by the bidder for an issue or issues 
of securities by which all the bonds he bids for must be 
awarded to him, or none at all. 

Amortization. 

The payment of a debt by means of annual or periodic 
contributions to a sinking fund. In the case of bonds pur- 
chased at a premium, it is the setting aside from annual inter- 
est such an amount as is sufficient to make good the premium 
at the maturity of the bond. 

Annual interest. 

Interest payable once a year, which is not considered de- 
sirable. 

Assessed valuation. 

The valuation placed upon property for the purpose of 
determining the amount of the tax paid by the owner. While 
most statutes require that property shall be assessed at its 
full or true value, the assessed valuation is rarely the actual 
cash value. The term is used principally in connection with 
the assessed valuation of real estate. 

Authorized issue. 

The total amount of bonds which may be sold pursuant 
to the statute or ordinance authorizing them. 

215 



216 MUNICIPAL BONDS 

Average maturity. 

Example: the average maturity of $20,000 bonds matur- 
ing $1,000 each year for twenty years, is ten years. 

Basis. 

The average annual percentage return upon the money 
invested. 

Below par. 

A price less than face value. 

Bonded debt. 

The gross bonded debt is the total of all outstanding 
bonds of the municipality. The net bonded debt is such total 
less sinking funds and funds on hand to pay maturing bonds. 
In computing net debt, particular attention must be given to the 
purpose for which such computation is made and statutory 
provisions strictly construed. 

Callable. 

Subject to call or redemption previous to the date of ma- 
turity. If a bond is callable, its price is based upon the term 
to the date when it may be called and not upon the term to 
maturity. Called bonds are those which have been called for 
redemption. 

Carry. 

A bank carries a broker's bonds when it makes a loan 
upon the bonds. 

Certified. 

Any fact which has been vouched for in writing. Thus 
the signatures and seal appearing upon a bond may be certi- 
fied to be genuine by some bank or trust company. A legal 
paper is certified by the municipal clerk to be a true and cor- 
rect copy of the original. 

Charter. 

The municipal charter is the grant of power to the munici- 
pality contained in the statutes enacted by the State legisla- 
ture. 

Coupons. 

Promissory notes attached to a bond and forming a part 
of the instrument until detached, promising to pay a definite 



APPENDIX C 217 

amount of money on definite dates. The amount of money 
promised is the semi-annual or annual interest at the rate 
borne by the bond. A detached coupon is a separate and 
distinct promise to pay. 

Coupon bonds. 

Those having coupons attached. 

Cremation certificate. 

It sometimes happens that too many bonds of an issue 
are printed, and they may or may not be executed. In any 
event the surplus should be destroyed and this is ordinarily 
accomplished by burning them. A statement signed by the 
persons witnessing the destruction of them is made and filed 
with a designated depository. This frequently happens in 
connection with New Jersey serial bonds. 

Currency bond. 

One not payable in gold coin, but in lawful money. 

Date of bond. 

It is ordinarily immaterial whether or not bonds be dated 
on Sundays or holidays, the usual opinion to the contrary 
notwithstanding. 

Debenture. 

A bond which is not secured by a mortgage. 

Definitive bonds. 

The preparation of bonds is sometimes delayed, and in 
anticipation of their issue, temporary receipts are given to the 
purchaser. These are exchanged for the definitive bonds 
when the latter are ready for delivery. 

Denomination. 

The face value of a bond, ordinarily $1,000. Bonds of 
$500 and $100 denominations are sometimes issued, but this 
practice should be avoided. 

Depreciation. 

The amount charged off for wear and tear, obsolescence, 
and reduction in value of property. 



218 MUNICIPAL BONDS 

Direct obligation. 

The full unlimited and unqualified promise of the obli- 
gator in a bond or note, as used in connection with municipal 
securities, means that the bond is supported by the full tax- 
ing power of the municipality, operating upon all its taxable 
property. Distinguished from special assessment bonds and 
those issued by a municipal corporation for and on account 
of a tax district. 

Discount. 

The percentage or price of a security below the par or 
face value. If par is $100 and the bond sells at $95, the 
discount is 5 per cent, or $5. 

Drawn bond. 

One drawn by lot for payment before maturity. 

Escrow. 

Escrow is the practice of depositing papers or securities 
with a third party to be held until a designated event takes 
place. For example, a municipality may deposit its bonds 
with a bank, and the purchaser may pay the purchase price to 
the same bank, the transaction to be consummated when proof 
in stipulated form is deposited with the bank that no litiga- 
tion exists with regard to the issuance of the securities or the 
purchase of property for which the bonds are issued. 

Ex-coupon. 

Without interest. Coupons already due or about to be- 
come due, detached. 

Face value. 

The equivalent of par because par does not always include 
accrued interest. If the bond is for $1000, its face value 
is the same. 

Fiscal agent. 

Banks in large cities or par points are sometimes desig- 
nated by municipal corporations as fiscal agents. Such desig- 
nations ordinarily mean only that the interest or principal ot 
bonds will be paid at such bank. The term is larger than its 
application. 



APPENDIX C 219 

Fiscal year. 

A yearly period, regardless of the calendar year, for 
which books are kept, or in the case of municipalities, for 
which provision for expenses is made. 

Five-twenties. 

Bonds due in twenty years, but callable after five years. 
(See Callable.) 

Flat. 

Without accrued interest. 

Floating debt. 

Notes, certificates, or short-term bonds, ordinarily issued 
to provide funds for running expenses, or in anticipation of 
the issue of permanent bonds. Distinguished from bonded 
debt. 

Franchise. 

A privilege granted by governmental authority, such as 
the right to form a corporation, or to place tracks in a street. 

Funded debt. 

Bonded debt permanent in its nature as distinguished from 
a temporary floating debt. 

Funding. 

The operation of converting floating indebtedness into 
funded debt. 

Gold bonds. 

Those payable in United States gold coin of the present 
standard of weight and fineness. If a bond is payable in gold, 
the salesman has an additional talking point, but a promise 
to pay in gold has no other value. The practice of making 
bonds payable in gold is largely abandoned. 

Income basis or return. 
See Net return. 

Indorsed bond. 

One upon which something has been written, such as the 
owner's name. Such a bond may not be a good delivery, that 
is, the intending purchaser is not obliged to accept it. Noth- 



220 MUNICIPAL BONDS 

ing should be written upon a bond. If an assignment is nec- 
essary and no provision is made for it on the back of the 
bond, write the assignment on a separate paper and attach it 
to the bond. 

Installment bonds. 
See Serial bonds. 

Interchangeable bonds. 

A coupon bond may sometimes be surrendered and a new 
oond issued in registered form, and a registered bond sur- 
rendered and a new coupon bond issued in place of it. This 
is rare in the case of municipals. 

Interest. 

The price of money. The interest on a $1,000 bond at 
5 per cent is $50 a year, which is the price the borrower 
pays for the use of the money for one year. 

Issue price. 

The price at which an issue of bonds is offered to the 
public. 

Joint account. 

Two or more persons, investment bankers or banks, may 
buy an issue of securities. This is sometimes called a syndi- 
cate. The partner having charge of the transaction is called 
the syndicate manager. 

Judgment bonds. 

Bonds issued to fund a judgment. 

Lawful money. 

This is money which the government declares to be legal 
tender in payment of obligations. Distinguished from gold 
coin. 

Legal investments. 

Those which the statutes and regulations of various States 
prescribe as being proper investments for savings banks and 
trustees. They sell at a better price than bonds not "legal." 

Legal Rate of Interest. 

A fixed maximum interest rate established by statute. 



APPENDIX C 221 

Lien. 

A claim against property which the creditor may have 
applied to the satisfaction of a debt. A mortgage is a lien. 
A municipal bond is almost never a lien and the term should 
not be used in describing municipal bonds. 

Market value. 

The price which a security will probably bring if sold. 
The market value of a security listed on the New York Stock 
Exchange is easily determinable. The market value of mu- 
nicipal bonds depends upon the concensus of dealers' opinions. 

Maturity. 

The date when bonds are payable. 

Negotiable instrument. 

An obligation which may be transferred free from 
equitable defenses which the maker may have against the 
original holder. 

Net debt. 

See bonded debt. 

Net price. 

The lowest price, less discounts or other allowances. 

Net return on investments. 

The amount of return to the investor, taking into con- 
sideration interest rate, the price of the security, whether 
above or below par, and the term of the bond. 

Premium. 

The price of a security in excess of its par or face value. 
If a $1,000 bond sells for $1,090, the premium is $90. 

Principal 

The amount promised to be paid; the face value of a 
bond. 

Quasi-municipal. 

A term applied to water districts, irrigation districts and 
road districts. 



222 MUNICIPAL BONDS 

Railroad-aid bonds. 

Those issued by municipalities to raise funds to give finan- 
cial assistance to a railroad. Fortunately now forbidden to 
be issued in most States. 

Redeemable. 
See Callable. 

Refunding. 

The issuing of new bonds to take the place of old ones. 

Registered bond. 

A bond payable to a designated payee. Such bonds may 
be registered both as to principal and interest, or registered 
as to principal only. Most municipal bonds are in the first 
instance issued as coupon bonds with the privilege of registra- 
tion as to principal only, or as to both principal and interest. 
A registered bond can be transferred only by assignment and 
does not pass by delivery or endorsement. 

Revenue bond. 

One issued in anticipation of current taxes, or revenues. 

Sealed bid. 

A proposition to purchase bonds in response to an adver- 
tisement calling for such tender, is usually submitted in a sealed 
envelope, in order that bidders may not know the prices their 
competitors are willing to offer. Sealed bids are opened at 
one time, and no modification of such a bid can be made, after 
bids are opened. 

Semi-annual interest. 

Interest payable twice a year — as on January first and 
July first. 

Serial bonds. 

An issue of which the bonds are payable in installments. 
Thus an issue of $100,000 bonds payable $10,000 a year 
for ten years, is an issue of serial bonds. 

Sinking fund. 

This is a fund provided by contributions made at stated 
intervals to provide for the payment of the principal of the 
debt. 



APPENDIX C 223 

Special assessment bonds. 

A bond payable from assessments and for which the 
credit of the issuing municipality may not be pledged. As it 
is a bond payable from a special fund, it may not be a nego- 
tiable instrument. 

State bonds. 

Those issued by one of the States of the Union. 

Syndicate. 

See Joint account. 

Temporary certificates. 
See Definitive bonds. 

Ten-twenties. 

Bonds due in twenty years but subject to redemption at or 
after ten years. 

Warrant. 

Municipal paper which is usually an order upon the treas- 
urer for the payment of money. 

When and as issued. 

Sales of securities are sometimes made prior to the actual 
issue "when, as and if issued," to protect the seller from 
liability in case the securities are never issued. 

Bibliography 

Chamberlain, Lawrence: The Principles of Bond Investment. 

Dillon: Law of Municipal Corporations. 

Jordan, David L. : Investments. 

Raymond, William L. : American and Foreign Investment Bonds. 

Rollins, Montgomery: Municipal and Corporation Bonds. 

An extremely valuable compilation of articles on investment securities is 
contained in The Annals of the American Academy of Political and Social 
Science, for March, 1920, in which the following articles appear: 

Arens, Herman F.: Causes Affecting the Value of Bonds. 
Lyons, Hastings: Classification of Investment Bonds. 
Osgood, Roy C: The Effect of Taxation on Securities. 
Rollins, Montgomery: Tables of Bond Values — Theory and Use. 



INDEX 



Acceptable denomination, 108 
Acceptable duration, 108 
Account, joint, 220 
Accrued interest, 215 
Act, Gardner, 39, 40 

Concerning Municipalities, N. J., 28 
Acquisition of property, 27 

limitations on, 27, 28 

methods of, 27 
Activities, municipal, 27-31 

acquisition of property, 27 

building houses, 31 

public improvements, 28 

public utilities, 30 

sale of commodities, 31 
Advertisement, bond prices 20 years 
ago, 139 

$31,800,000 New York State bonds, 
144 
Agent, fiscal, 218 
Agreement, deposit, 89, 90 
All or none, defined, 215 
Amortization, 215 
Annual interest, 215 
Appreciation, potential, 108, 109 
Area, limitation of, 70, 71 
Assessed valuation, 132, 133, 215 
Assessment bonds, 69 

not negotiable instruments, 70 
Atkinson, Raymond C, 39 
Attorneys' functions, 161-179 
Authorized issue, 215 
Average maturity, 216 
Award and sale, 85-95 

B 

Bad faith, 99, 100 

Bargain and sale, actual operation 

one of, 85 
Basis, 216 

Below par, defined, 216 
Bibliography, 223 
Bid, sealed, 222 

Bona fide purchaser has good title, 10 
Bond, 

classification, 155 



Bond, 

classification according to means of 
payment, 159 

classification according to tax dis- 
tricts, 157 

classification according to time of 
payment, 73 

date of, 217 

issue, ordinance authorizing, 4 

issue, origin of, 2, 3 

maturity of, 73-84 

narrative of, 11 

values, tables of, 129 
Bonds, 

assessment, 69, 70 

callable, 73 

city, 155 

classified, 155 

county, 62, 155, 156 

coupon, 217 

currency, 217 

definitive, 217 

different forms of, 10, 11 

drawn, 218 

electoral, 159, 160 

Federal, 62 

gold, 219 

indorsed, 219 

installment, 77, 220 

interchangeable, 220 

as investments, 105-117 

judgment, 220 

minor municipalities, 156 

necessary public purposes, 157, 
158 

not equally valuable, 131 

not liens, 101 

particular, 155-160 

properties and improvements, 158, 
159 

railroad-aid, 222 

serial, 77, 222 

special assessment, 223 

State, 223 

tax districts, 156, 157 

term, and term of, 72, 73 
Bond Buyer, 180, 181 
Bonded debt, 216 



225 



226 



MUNICIPAL BONDS 



Bondholder, 

contracts with, 102-104 

protected by U. S. Supreme Court, 
162, 163 

remedy of, in face of default, 96-104 
Borrowing, municipal, 42 
Brokerage and commissions, 90, 91 
Building houses, 31 



Camden, School Bond Ordinance, 7, 8 

Callable, denned, 216 
Capital expenditures, 26 
Carry, defined, 216 
Certificate, cremation, 217 
Certification of signatures and seal, 

153, 154 
Certified, defined, 216 
Charter defined, 216 
City bonds, 155 
Classification of bonds, 155 

according to means of payment, 159 

according to tax districts, 157 

according to time of payment, 73 
Classification of municipal corpora- 
tions, 22 
Clifton, N. J., Annual Report of Sink- 
ing Fund Commission, 81-84 

budget, 6, 7 

tax ordinance, 5, 6 
Coast Banker, 181 
Commercial and Financial Chronicle, 

138, 181 
Commercial West, 181 
Commissions and brokerage, 90, 91 
Commodities, sale of as city right, 31 
Compulsory "payment, 61, 62 
Conditions of negotiability, 9, 10 
Constitutional debt limits, 45-49 

exceptions, 45-48 

illustrations of, 46 
Constitutional limitations on taxation, 

68, 69 
Contingent debt, 63 
Contracts, 

with bondholder, 102-104 

fiscal agency, 89 
Counsel, 

employment of, 184 

must have record of proceedings, 
165 

when retained by purchaser, 164, 
165 
County bonds, 155, 156 

versus municipal, 62, 63 



Coupon bond, 10, 11, 216, 217 

New Jersey, registerable as to prin- 
cipal only, or as to both princi- 
pal and interest, 13-15 
New York, registerable only as to 
both principal and interest, 15, 
16 
versus registered bond, 11, 12 
Creation of municipalities, 20 
Credit, factor in valuation, 134, 135 
Cremation certificate, 217 
Currency bond, 217 



Date of bond, 217 
Debenture, 217 
Debt, 

bonded, 216 

contingent, 63 

funded, 219 
Debt limit, 66, 67 

constitutional, 45-49 

contained in Pierson Act, 48, 49 

exceptions, 45-48 

illustrations of, 46 
Debt, net, 221 

reduction, table showing, 84 

service, 26, 27, 37 
Debt statements, 

annual, New Jersey city, 56, 57 

forms of, 54-60 

New York second class city, 54, 55 

New York third class city, 55, 56 

summary, New Jersey city, 60 

supplemental, New Jersey city, 59, 
60 
Default, 

former cases of, 96, 97 

reasons for, 97-99 

and remedy of bondholders, 96-104 
Deferred serial plan, 78, 79 
Definitions, terms used in investment 

banking, 215-223 
Definitive bonds, 217 
Denomination, 217 

acceptable, 108 
Deposit agreement, 89, 90 
Depreciation, 217 

Determination of time of payment, 73 
Development of cities, historical, 24, 

25 
Dillon's estoppel, clause, 12, 13 

views on borrowing, 43, 44 
Direct obligation, 218 
Discount, 218 




INDEX 



227 



Dollar, purchasing power of, 130 
Drawn bond, 218 
Duration, acceptable, 108 



Early importance of municipality, 

1, 2 
Economist, 181 
Education Law, 149 
Electoral bonds, 159, 160 
Escrow, defined, 218 
Estoppel, 146, 147 

Dillon's clause, 12, 13 
Evaluation of bonds, 137 
Excise taxes, 36 
Ex-coupon, 218 
Exemption, 

tax, 107 

from care, 107, 108 
Expenditures, 

capital, 26 

debt service, 26, 27 

municipal, 25, 26 

running, 26 
Expense of issuing bonds, 99 



F 



Face value, 218 

Federal bonds versus municipal, 62 

Federal tort theory, 70 

Fair income return, 107 

Fiduciaries, investments by, 109, 110 

Fiscal, 

agency contracts, 89 

agent, 218 

year, 219 
"Five-twenties," 219 
Flat, 219 

Floating debt, 219 
Forgery, possibility of, 182 
Forms, 

of bonds, 10, 11 

of coupon and registerable bonds, 
13-17; (see also, specimen fac- 
ing page 1) 

of municipal ordinances and bud- 
gets, 5-8 
Franchise, 219 

Fraud, how avoided, 182, 183 
Fund, sinking, 74-84, 223 
Funded debt, 219 
Funding, 219 



G 



Gardner Act, 39, 40 
General Municipal Law, 149 
General rights of municipalities, 29 
Glossary, 215-223 
Gold bonds, 219 

Good title, bona fide purchaser pos- 
sesses, 10 

H 

Honesty, improvement in civic sense 

of, 145 
Houses, building, 31 



I 



Improvements, 

and properties, bonds for, 158, 159 

public, 28 
Income, 

fair return, 107 

stability of, 106, 107 

taxes, 36, 37 

tax versus personal property tax, 
118, 119 
Income basis or return, 219 
Incontestability and validation, 145- 

154 
Incurred indebtedness, limitations on, 

44 
Indebtedness, 133 
Index of municipal bond market, 

1900-1922, 40 
Indorsed bond, defined, 219 
Information, sources, 137 
Inheritance taxes, 124, 125 
Installment bonds, 220 
Installments, equal annual, 77, 78 
Interchangeable bonds, 220 
Interest, 128, 220 

accrued, 215 

annual, 215 

legal rate of, 220 

semi-annual, 222 
Invalidity of municipal bonds, 10, 11 
Investment, 

bonds as ideal, 105-117 

definition of, 105 

by fiduciaries, 109, 110 

legal, 220 

net return on, 221 

for savings banks, 109, 110, 112-116 
Issue, authorized, 215 

price, 220 

purpose of, 71, 72 



228 



MUNICIPAL BONDS 



Joint account, 220 
Judgment bonds, 220 
Judicial valuation, in Georgia, 150, 
151 
sustained, 151, 152 



Law, 

application to municipal financing, 
161, 162 

defined, 161 
Lawful money, 220 
Legal investments, 220 

for savings banks, 109, 110, 112-116 
Legal side, progress on, 145, 146 
Legal rate of interest, 220 
Legality, independent of power to pay, 
69 

questions of, 162-164 
Legislation, imperfection of all, 146 
Legislative ratification, 53 
Legislative relief, 104 
Lien, 221 
Limit, debt, 66-67 
Limitations, 

of area, 70-71 

constitutional, on taxation, 68, 69 

short statutes of, 147 

on taxation, 67, 68 
Limited tax rate, effect of, 102 
Loans, short-term, 53, 73 
Loeffler, H. G., 40 



M 



Manufacturers Record, 181 
Market conditions, 130, 131 
Market value, 221 

of State and municipal bonds com- 
pared, 135-137 
Marketability of bonds, 107 
Maturity, of bond, 73-84, 221 

average, 216 
Means of payment, classification by, 

159 
Memorandum for examination of mu- 
nicipal bonds, 174-179 
Minor municipalities, bonds of, 156 
Money, 

a commodity, 128 

lawful, 220 
Municipal bond, 9 

invalidity of, 10 

origin of, 1 



Municipal bond, 

redemption of, 32 

security of, 13 

term of, 72 
Municipal, 

borrowing, 42 ; Dillon's views of 
borrowing, 43, 44 

corporations, powers and functions 
of, 21 ; classification of, 22 

expenditures, 25, 26 

Finance Act of North Carolina, re- 
print, 197-214 

property and improvements, 24-31 

ordinances and budgets, 5 
Municipalities, 

activities and functions of, 27-31 

creation of, 20 

early importance of, 1, 2 

general rights of, 29 

legislative control of, 18-20 

quasi, 63, 64 

true, 63 

N 

Narrative of bond, 11 
Negotiability, conditions of, 9, 10 
Negotiable instrument, 221 

power to issue, 49-53 
Net, 

debt, 221 
price, 221 

return on investments, 221 
yield, 129 
New Jersey coupon bond, register- 
able as to principal only, or as 
to both principal and interest, 
13-15 
New York coupon bond, registerable 
only as to both principal and 
interest, 15, 16 
New York registered bond, 17 
Nominal yield, 128 
North Carolina Municipal Finance 

Act, reprint, 197-214 
Notice of bond issue, publication of, 

4, 5 
Notice of sale, New York Union Free 
School District Bonds, 92, 93 
bonds of New Jersey city, 93, 94 



Offerings, public, 

for week ended Dec. 16, 1921, 141 
for week ended Dec. 30, 1921, 142 

One Per Cent Law, Smith, 39 



INDEX 



229 



Opinion, 

final, 165, 167 

as to legality, 165 

preliminary, 165 

qualified, 167 

when merchantable, 168 
Ordinance authorizing bond issue, 4 
Origin, 

of bond issue is public necessity, 2, 3 

of municipal bond is a statute, 1 
Outline analysis of subject, 187-195 



Pacific Banker, 182 
Par, below, 216 
Particular bonds, 155-160 
Payment, compulsory, 61, 62 

means of, 159 

promptness in, 189 
Personal property versus income tax, 

118, 119 
Pierson Act, debt limits in, 48, 49 
Place of payment should be New York 

or par point, 183, 184 
Poll taxes, 35, 36 

Population, factor in valuation, 134 
Portage la Prairie, 100 
Postal savings deposits, legal securi- 
ties for, 110, 111 
Potential appreciation, 108, 109 
Power to issue bonds, 162 
Power to issue negotiable instruments, 
49, 50 

granted by County Law, 50 

granted by General Municipal Act, 
51, 52 

granted by Pierson Act of New Jer- 
sey, 52 

granted by Municipal Finance Act 
of North Carolina, 53 
Power to pay, legality independent of, 

69 
Practical suggestions, 180-184 
Preliminary steps in issuing bonds, 3 
Premium, 221 
Preparation of bonds, 182 
Price, issue, 220 

net, 221 
Prices and yields, 20 years ago, 139 

week ended Dec. 16, 1921, 141 

week ended Dec. 30, 1921, 142 
Principal, 221 

security of, 106 
Printing of bonds, 4 
Prior redemption, notice of, 74 



Private sale, 85 

Problem of municipal bond stated, 1 
Procedure, questions of, 162 
Promise and purpose of bond, 66-72 
Promissor in bond, 61-65 
Property, acquisition of, 27 

and improvements, bonds for, 158, 
159 

taxes, 36 
Proposal, form of, for New York 
Union Free School District 
bonds, 93 

for bonds of New Jersey city, 95 
Protection of bondholder by U. S. Su- 
preme Court, 162, 163 
Publication of notice, 4, 5 
Publicity, 180 
Public purposes, bonds for necessary 

157, 158 
Public sale, 85, 86 

disadvantages of, 86 

illustrations and notices of, 91-95 

New Jersey plan concerning, 87, 88 

New York statute governing, 86, 87 

public notice of, 86 
Public utilities, 30 
Purchaser, bona fide has good title, 

10 
Purchasing power of dollar, 130 
Purpose of issue, 71, 72 

classification according to, 157 
Purpose and promise of bond, 66-72 

Q 

Quasi-municipal corporations, 22, 23 

classified, 22 

defined, 221 
Quasi municipalities, 63, 64 



Railroad-aid bonds, defined, 222 
Rates, tax, 133, 134 
Ratification, legislative, 53 
Receivers cannot be appointed, 103 
Record memorandum, form of, 169- 

173 
Redeemable, 222 
Redemption of municipal bonds, 32 

prior, 74 
Refunding, 53, 222 
Registered bond, 

defined, 222 

New York, 17 

versus coupon, 11, 12 



230 



MUNICIPAL BONDS 



Registration of bonds, 10, 11 
with public official, 152, 153 

Relief, legislative, 104 

Remedy of bondholders, 96-104 

Revenue, 41 

bond, defined, 222 

Rules of the game, 180 

Running expenditures, 26 



Sale, 

and award, 85-95 

of commodities, 31 

illustrations of notice of public, 91- 

95 
importance of plan of, 91 
of New York City bonds, results of, 

142, 143 
par, 88 
private, 85 
procedure of, 5 
public, 85-86 
Saturation point, 134 
Savings banks, legal investments for, 

109, 110, 112-116 
School Bond Ordinance, Camden, N. J., 

7,8 
Sealed bids, 222 

Seal and signatures certified, 153, 154 
Second Class Cities Law, New York, 

28, 29 
Security, of municipal bond, 13 

of principal, 106 
Semi-annual interest, 222 
Serial bonds, 77, 222 

advantages of, 78 
Serial plan, deferred, 78, 79 
Serial and sinking fund plans, com- 
parative cost, 81 
Short-term loans, 53, 73 
Side agreements, 183 
Signatures and seal certified, 153, 154 
Sinking fund, 74, 75, 222 
advantages of, 76, 77 
annual contributions to, 75, 76 
Commission, Clifton, N. J., annual 

report of, 81-84 
clause or contract, example of, 79, 

80 
misuse of, 76 
requirements for each $1,000 bond, 

80, 81 
and serial plans, comparative cost, 
81 
Sixteenth amendment to Federal Con- 
stitution, effect of, 122 



Smith One Per Cent Law, 39 
Sources of information, 137, 138 
Special assessment bonds, 223 
Stability of income, 106, 107 
State bonds, 223 

versus municipal, 62 

versus municipal, values, 135-137 
Statutory powers, 

Act Concerning Municipalities in 
N. J., 28 

Second Class Cities Law in N. Y., 
28, 29 
Suggestions, practical, 180-184 
Syndicate, 223 



Taxation, 

of bonds, 118-127 

of bonds of non-residents, 124 

of income from State and municipal 
bonds, 121-124 

of principal of State and municipal 
bonds, 121 

clause provides for payment of 
principal and interest, 37 

definition of, 32 

delegation of power of, 34 

and limitation of taxes, 32-41 

limitations, 67, 68 

personal property versus income, 
118 

power of, 32, 34 

provisions important to bondholder, 
38, 39 

public purpose boundary of, 34, 35 

test of right of, 35 
Tax, 

districts, bonds of, 156, 157 

exemption, 107 

-free versus taxable bonds, 126, 127 

limit, argument against, 40 

limits on debt service, argument 
against, 41 

rates, 102, 133, 134 

ordinance, Clifton, N. J., 5, 6 
Taxes, 

classification, 35 

debt service, 37 

excise, 36 

income, 36, 37 

inheritance, 124, 125 

poll, 35, 36 

property, 36 

purposes for which levied, 120 
Taxing power, definition, 119 

Federal, limitations on, 119, 120 



INDEX 



231 



Taxing power, 

State, 120 

State, limitations on, 120 

United States, 119 
Temporary certificates, 223 
"Ten-twenties," 223 
Term bonds, 73 
Term of bonds, 72 

related to life of improvement, 79 
Terms used in investment banking de- 
fined, 215-223 
Time of payment, determination of, 73 
Title, purchaser has good bona fide, 

10 
Tort theory, Federal, 70 
True municipalities, 63 



Valuation, assessed, 132, 133, 215 

of bonds, 128-144 
Value, 

differences in, as between munici- 
palities, 131, 132 
face, 218 
market, 221 
Values, State versus municipal bonds, 
135-137 

W 

Wall Street Journal, 181 
Warrant, 223 

When and as issued, defined, 223 
Wholesale prices in U. S. for 110 
years, 143 



United States Mortgage & Trust Co. 
182 



Validation, 
by decree, 148, 149 
and incontestability, 115 
judicial in Georgia, 150, 151 
sustained, 151, 152 



Year, fiscal, 219 
Yield, 

net, 129 

nominal, 128 
Yields and prices, 20 years ago, 
139 

week ended Dec. 16, 1921, 141 

week ended Dec. 30, 1921, 142 



i 



